Dear Barnes & Noble, Inc. (NYSE:BKS) Public Relations Department,
I have been a shareholder in the company since 2010. I really like your books and content and I’ve believed that B&N could be a terrific turnaround play. Earlier this week, I noticed that Barnes & Noble, Inc. (NYSE:BKS) (B&N) shares sank 17% in Tuesday trading, to $15.61 on the New York Stock Exchange. That’s a big blow to my net worth. And this is the reason I’m writing to you now.
Blind management
To say that I’m not a big fan of Mr. William Lynch, the CEO, would be an understatement. Mr. Lynch is a technology veteran who previously worked at Palm Inc. He took the reins at Barnes & Noble, Inc. (NYSE:BKS) three years ago and orchestrated the push in digital book-selling. I have two issues with Mr. Lynch. First, I have no idea why B&N decided to hire a CEO from a maker of another obsolete electronic device such as Palm. Why not hire an expert in e-retail from Amazon.com, Inc. (NASDAQ:AMZN) or Apple Inc. (NASDAQ:AAPL)?
Second, I believe that Mr. Lynch likes to create his own reality. In the press release following the announcement of its fiscal 2013 report, Mr Lynch stated the following:
“Our Retail and College businesses delivered strong financial performances in fiscal year 2013,” said William Lynch, Chief Executive Officer of Barnes & Noble. We are taking big steps to reduce the losses in the NOOK segment, as we move to a partner-centric model in tablets and reduce overhead costs.”
I simply couldn’t believe what my ears just heard. The retail business didn’t, in fact, deliver “strong results.” It actually decreased by 6% year-over-year due to lower sales. Mr. Lynch conveniently preferred to highlight the fact that lower expenses in this segment led to higher EBITDA. But this doesn’t mean that the business is doing well going forward. In fact, it’s shrinking.
In addition, Mr. Lynch didn’t bother to focus on what the NOOK segment has cost Barnes & Noble, Inc. (NYSE:BKS) in fiscal 2013. In fact, losses at its Nook digital business more than doubled in the quarter ended April 27, easily wiping out profits generated at its bookstores. Mr. Lynch didn’t say a word about why the company lost $475 million on its NOOK business, but rather went straight on to his suggestion on how to amend things. I believe that learning from past mistakes is the only sure way to avoid these mistakes in the future. It seems to me that Mr. Lynch hasn’t done his share of homework.
The writing was on the wall
Back in 2011, the company announced a profit of $60.6 million, down 25% from a year earlier. The company also cut its quarterly dividend to free up $60 million to pursue its digital strategies (namely its NOOK e-book) and other potential opportunities (it’s considering purchasing some closed Borders locations). I now recall that this move made no sense to me back then. First, why would Barnes & Noble, Inc. (NYSE:BKS) consider buying more brick and mortar locations? Borders’ bankruptcy proved the big-box book retailer business model is dead.
But more importantly, to try and penetrate the e-book market with $60 million was absolutely insane. How did B&N expect to compete with Amazon and Apple (its competitors in the digital book market) with so little cash? Back in 2011, Apple had $29 billion, and Amazon had more than $8 billion. In other words, $60 million (which B&N had to cut its dividend to realize) is nothing to the company’s larger competitors. You simply can’t penetrate a saturated market with such a paltry sum.
And that’s precisely the reason why B&N is losing share in the e-book market. Unlike in past quarters, this time B&N didn’t address its share of the U.S. e-book market. Last fall, during a presentation to investors, Mr. Lynch said the company controlled approximately 27% of the e-book market. By late February, Mr. Lynch pegged B&N’s market share at an estimated 25% during a call with analysts. And all of this is happening while Apple’s iBooks business grew by 100% last year, maintaining a 20% share of the overall market, while Amazon’s Kindle controls 27% of the market.
Some final words
I believe that B&N is stuck between a rock and a hard place. It cannot make money on brick and mortar book stores because the future book market belongs to e-books. But It also can’t make money on e-books because it was too late and too cheap to enter the e-book market aggressively. I think I will sell my shares as soon as trading rules allow.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple.
The article A Letter From a Barnes & Noble Shareholder originally appeared on Fool.com and is written by Shmulik Karpf.
Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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