Barnes & Noble, Inc. (BKS): End of the Road or a New Beginning?

On Monday afternoon, Barnes & Noble, Inc. (NYSE:BKS) announced that CEO William Lynch had resigned. The company made a variety of management changes to accommodate his departure, but it notably didn’t appoint a new CEO. Instead, the top executives will report to company founder and executive chairman Leonard Riggio.

Riggio has been interested in buying Barnes & Noble, Inc. (NYSE:BKS)’s main business — its bookstores and website — to take them private. Riggio hasn’t yet made an offer, but this looming possibility adds to the uncertainty caused by Barnes & Noble’s loss-making ways and its current executive turmoil. Is Barnes & Noble, Inc. (NYSE:BKS) about to go under, as top rival Borders did two years ago? Or is the company on the verge of a renaissance?

Competing with a giant
Barnes & Noble put a host of mom-and-pop bookstores out of business as it built a retail empire over the past few decades. However, the company’s success was eventually disrupted by an even more efficient competitor: Amazon.com, Inc. (NASDAQ:AMZN).

Amazon.com, Inc. (NASDAQ:AMZN) has been able to offer much lower average prices than Barnes & Noble, Inc. (NYSE:BKS) because of its direct-from-warehouse operating model, its willingness to accept lower margins, and even its exemption from collecting most sales taxes. Furthermore, many consumers came to prefer shopping online to the hassle of waiting in a checkout line at a retail store.

Amazon.com, Inc. (NASDAQ:AMZN) created further headaches for Barnes & Noble with the launch of its Kindle e-reader in 2007. Since then, e-books have become a bigger and bigger part of the overall book market, accounting for 20%-25% of the market. Amazon retains the largest share of the e-book market.

A surprising result
Barnes & Noble has tried to react to these trends by launching its own website and its own line of Nook e-readers. However, Barnes & Noble, Inc. (NYSE:BKS) has never been as successful as Amazon in these initiatives. While Nook devices have often received good reviews, they haven’t sold as well as Amazon’s Kindles and have contributed huge losses to Barnes & Noble’s bottom line. The Nook division (which includes both e-reader/tablet hardware and content sales) posted an EBITDA loss of $475 million last year, or $253 million excluding a significant inventory writedown.

From a big-picture perspective, it’s clear that Barnes & Noble, Inc. (NYSE:BKS) has been investing lots of money in the Nook business with the goal of building up a viable competitor to Amazon. However, growth stalled out last year, while losses increased. As a result, Barnes & Noble is now dropping out of the tablet business, choosing to partner with other tablet manufacturers going forward.