Barnes & Noble: The Road Ahead

By Greg Sushinsky | March 15, 2011 AAA

For bookseller Barnes & Noble (NYSE:BKS), the recent bankruptcy filing of its rival, Borders Group, is leading investors to wonder about what's next. Will the failure of its rival and the rapidly changing book selling business signify doom for Barnes & Noble, or are there ways for this survivor to successfully remake itself?

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A Sad History of Decline
The Borders bankruptcy may one day stand as a symbol of the decline of the traditional book selling business. That said, Borders was arguably poorly managed even when the traditional hard-copy, brick-and-mortar bookstore model ruled the book selling world. Over expansion, poor management decisions, and its inability to adapt to digital publishing helped set Borders up for failure.

Amazon the Killer?
Amazon.com
(Nasdaq:AMZN) is to Borders and book selling what Netflix (Nasdaq:NFLX) is to Blockbuster (OTC:BLOAQ) and movie rental. Yet while the short story is that Amazon strangled Borders via the online marketplace and eventually plunged it into bankruptcy, the same fate hasn't befallen Barnes & Noble - at least not yet. Whether Barnes & Noble is simply next in line or learns and implements the lessons from Borders' cautionary tale is the issue.

Barnes & Noble's Situation
Barnes & Noble recently suspended its dividend, and although its total revenue has held up well recently, it has had slowing earnings. The company put itself up for sale, but with the turmoil in the marketplace there have been no takers so far. Barnes & Noble will continue to invest in its Nook e-reader, which competes with Amazon's Kindle and others, in the hope of capturing an even larger share of the e-book business.

The Digital Wave
While Borders hopes to emerge from bankruptcy leaner and more fit to compete, or at least to survive, much of present and most of the future of book selling is digital. Books-A-Million (Nasdaq:BAMM), another brick-and-mortar chain, has so far managed to stay profitable via able management, a developed internet presence and a diversity of products beyond books.

With e-book entrants such as Google (Nasdaq:GOOG) and new entrants in the e-reader or tablet area seemingly emerging every week, Barnes & Noble needs to accelerate the growth of its e-book business. It's investing heavily in Nook, so profitability will be dampened there for a while, but with its 25% share of the e-book market it's clear that digital is the future.

A Possible Future
The newspaper industry, with its printed paper product dying, has offered a potential model of survival if not growth. Pay-for digital news is already here, with NewsCorp (Nasdaq:NWS) (which owns the Wall Street Journal) among the publishers with digital publications. Magazines are migrating toward an online audience too. Added to this is the obvious advantage of NewsCorp and others such as The New York Times (NYSE:NYT), The Washington Post (NYSE:WPO) and Gannett (NYSE:GCI), which own broadcast, cable or internet businesses.

The Bottom Line
Barnes & Noble needs to adapt a similar model around diversifying into digital publishing. It needs to build up its digital stake substantially, find alliances and develop ancillary businesses so it won't be dependent on its physical stores. This is easier said than done, but Barnes & Noble's survival will depend on making this happen. (For related reading, also take a look at 4 Industry-Changing Tech Trends.)

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