Why Barnes & Noble Will Never Be Great Again

It may be time to close the book on Barnes & Noble.

Folks just aren't buying physical books these days, and the retailer's Nook hasn't been the lifeboat that the company envisioned when it rolled out a way to cash in on the migration to digital reads. The death of rival Borders -- an event that seemed to trigger an opportunity -- is now merely a literary practice called foreshadowing.

Shares of Barnes & Noble (BKS), the last major bricks-and-mortar bookseller, took a 12 percent hit Tuesday after announcing disappointing quarterly results.

Revenue declined 8.5 percent, and it could have been worse if not for a slight uptick in Barnes & Noble's college bookstore business. At the namesake stores that we all used to frequent more frequently, same-store sales plunged 9.1 percent.

Investors used to dismiss weakness at the retailer's physical stores, figuring that the company would eventually make that back through its digital e-reader initiatives. Well, the news is even worse on that front, as Nook revenue fell by a little more than 20 percent during the period.

Everyone knows how this story will end, even if there are too many people that don't want to spoil the ending for others.

Nook Is Not the Hook
Several months ago it seemed as if the troubled chain had at least two ways out of this mess.

Microsoft (MSFT) paid up for a minority stake in the company's Nook and college bookstore business. Founder Leonard Riggio expressed interest in acquiring the original retail bookstore business.

It was perfect. Microsoft or any of the subsequent Nook investors could've acquired that subsidiary to take on Apple's (AAPL) iPad or Amazon.com's (AMZN) wildly successful Kindle. Riggio could have then taken back the namesake bookstore chain that he started. Even if one walked, shareholders would be able to cash in on the money raised by selling the other.

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Well, that story doesn't have a happy ending either.

Riggio revealed on Tuesday that he is withdrawing interest in taking the retail business private. This leaves potential interest in the Nook business, but who wants to buy a fading digital platform?

Nook's 20.2 percent decline in sales during the last three months hurts, but what's even worse is that devices and accessories revenue tumbled 23.1 percent in that period. In other words, the interest in Nook by new readers is fading even faster than the digital sales to existing e-reader owners.

Why would Microsoft want that? Nook is not much of a hook, and it's not as if the software giant doesn't have enough to worry about in trying to revive its operating system at a time when PC sales are falling nearly as quickly as Nook sales.

Excuses for Dummies
There's no shortage of scapegoats.

Barnes & Noble blames the retail-level weakness on a lack of hit titles. It points to last year's success of the "50 Shades of Grey and Hunger Games" trilogies in propping up sales. However, even the chain concedes that comps would have still been negative even if neither trilogy existed last year.

In explaining the continuing slide of Nook popularity, Barnes & Noble offers up another excuse that doesn't hold up.

"We spent substantial time and resources last year preparing our individual businesses to operate independently in anticipation of the potential for their separation," Nook's head said during Tuesday's conference call. Now that the trial separation isn't working -- the chain and the e-reader are stuck with one another -- Barnes & Noble feels that it can work on integrating the two businesses.

That's a tough chapter to swallow. It's hard to see how two platforms fading in popularity can help one another at this point. Amazon has no problem growing its Kindle business, and it's doing so without any kind of store presence.

Borders tried to push its non-Nook and non-Kindle e-readers on its shoppers all the way until the end when it had to mark them down in its liquidation sale.

Final Chapter
The near future doesn't look pretty.

Barnes & Noble continues to forecast declining sales for the entire fiscal year.

Wall Street's paid to have a longer view, and that's only uglier. Analysts see Barnes & Noble's deficit widening from $1.01 a share this year to $1.28 a share next year and a brutal $2.45 a share loss the year after that.

We know how this story ends, and today's investors may be well served by more savvy market watchers ruining the ending for them before the ending ruins them.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft.

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