Or They Could Just Kill It Off Or Sell It
I’ve made the argument before that Microsoft might completely acquire Barnes & Noble. As crazy as this sounds, Microsoft could use their superior software margins to compete effectively on price with Amazon.com, Inc. (NASDAQ:AMZN) and others. Microsoft gaining access to the over 670 Barnes & Noble college bookstores would also give the software giant a place to try and win market share for smartphones and tablets. However, if that deal never happens, Barnes & Noble should consider sticking the NOOK in a corner.
In case you don’t believe that Barnes & Noble, Inc. (NYSE:BKS) would be better off without the NOOK, consider these facts. Including NOOK, revenue was down 8.8%–without this division revenue would have been down 8.19%. Same-store sales in retail were down 7.3% with NOOK, and just 2.2% without. Most important, EBITDA, which was down with NOOK, would have actually increased 5.63% without this unit. The bottom line is that Barnes & Noble doesn’t know the digital distribution business, and no matter how they spin it, the NOOK isn’t driving anything other than losses.
If a technology company like Microsoft didn’t want the NOOK business, the most obvious choice for the tablet would be Best Buy Co., Inc. (NYSE:BBY). Best Buy is very good at selling smartphones and tablets, and having their own device would allow the company to compete more directly with Amazon.com, Inc. (NASDAQ:AMZN). Perhaps a partnership between Best Buy and Microsoft would work. No matter what direction this unit goes, it has to go.
So What Happens To The Retail Division?
If the retail division of Barnes & Noble goes, there isn’t much left. The retail business represents 67.68% of revenue, and 86.21% of positive EBITDA in the current quarter. I have to believe when retail goes, the other pieces go the the highest bidder.
From an investment standpoint, Barnes & Noble is being valued very cheaply at the current time. The company has no long-term debt and about $214 million in cash. With a market cap of less than $1 billion, at current prices, the whole company minus the cash is valued at about $800 million. Given that the company has about $4.2 billion in assets and less than $3 billion in debts, it seems reasonable that there is some hidden value here. Investors buying Barnes & Noble today have to look at the company as a turnaround or buyout opportunity.
While I think there is value inBarnes & Noble, Inc. (NYSE:BKS) beyond the current stock price, longer-term investors should likely look elsewhere. Amazon.com, Inc. (NASDAQ:AMZN) certainly isn’t cheap at over 175 times forward earnings, but there is no doubt they are putting physical retailers out of business. For more conservative investors, Target Corporation (NYSE:TGT) and Wal-Mart look like good plays as well. These two companies give investors real earnings growth, and a yield of at least 2%, which neither Barnes & Noble nor Amazon can claim.
The article This Company Is Missing The Real Problem originally appeared on Fool.com and is written by Chad Henage.
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