Opening the Book at This Bookseller
This article is part of the Real-Money Stock Picks portfolio series.
You may call me crazy, but hear me out. I think the bricks-and-mortar bookseller Barnes & Noble is worth investing in today.
Sure, I know all the arguments against Barnes & Noble: Amazon.com is eating Nook's lunch with the Kindle, online retail is growing, and bricks-and-mortar retail is soooo 20th century. But I think that, like many times before, what "everyone knows" isn't as true as popularly believed, and therein lies an opportunity.
A Tale of Two Companies
Up front I'll say that the Nook has been a disaster for B&N. Sales of the device have declined for the past three quarters, the segment is losing money (and has never made an operating profit), and the thing is a distraction for management. In my opinion, the best step that B&N could take would be to sell it to Microsoft , something that seemed to be on the verge of happening earlier this year. Microsoft has already sunk $605 million into the joint venture where Nook sits. Let them chase it, giving them something to use to compete against Google and Apple (and Amazon). After all, Microsoft did something similar with the Nokia phone business - first partnering with it, then buying it. Last May, it seemed they were going to do the same with the Nook.
The next best thing would be for management to kill the Nook.
If the company does either of those two things, then Wall Street would wake up to the strength of the underlying book and textbook business the company has. The retail book segment has seen declining sales on a rolling trailing 12-month basis for the past seven periods through its just-announced fiscal 2014 second quarter (averaging 6.4% declines year-over-year). However, it has enjoyed increasing operating profits over at least six of those seven periods (at an average of 56.6% per period; the company hasn't yet reported segment operating profits for Q2 2014). The college textbook business, with sales roughly one-third of the retail book business, has been a steady performer and (slightly) operating profitable for the past several years. In other words, it's doing something right, and with renewed focus, the situation could improve.
Riggio's War, Then Peace
For several months, Chairman and largest shareholder Leonard Riggio tried to take the company private -- at least the retail segment. Then, last summer, he pulled back from that attempt. At the same time, management said it would focus on managing its current business as a whole.
I wonder what kind of deal Riggio and B&N's management struck. The possibility that makes the most sense to me is that Riggio has agreed to let management try to make a success of the Nook, but he's given the company a time limit to do so (or at least show progress toward that goal). If the company fails, then either he can buy the retail business or the company will have to unload the Nook somehow.
The Foolish bottom line (sorry, I ran out of puns)
Note, that's speculation on my part, but it's the only thing I can think of that would get the largest shareholder to back off for a while. If I'm right, then the company will be better one way or the other, which would help shares rise. If I'm wrong, then Riggio would renew his bid and I'd win from his (likely) paying a premium for the retail segment. The only thing that would lead to a total loss would be if Riggio has truly given up and no longer cares, and he's letting the company do whatever it will. I believe that's unlikely, however, because the man founded the company, which means to me that he'd hate to see it killed.
With everyone's focus centered on online sales and the dominance of Amazon, I don't think the market has quite woken up to the situation at B&N, which means there's a messed-up expectation right now. So, I'm going to buy a few shares for the MUE portfolio and see what happens.
Do note, however, that I'm only giving the company a limited amount of time to do its thing. In other words, this won't be The Neverending Story.
The future of retail
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The article Opening the Book at This Bookseller originally appeared on Fool.com.
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