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?

IN PICTURES: Learn To Invest In 10 Steps

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center