Barnes & Noble, Inc. (BKS)’s Dangerous Decision

Riggio hasn’t said what he’s willing to pay for the business, but he has said that he’s most interested in the retail assets, wanting to leave the Nook out of the deal. I originally argued that that was going to be a boon for investors, who have watched the Nook drag down sales while having the company’s own value underestimated due to the weakness of the combined retail-Nook business. I’m not so sure that’s the case anymore. The retail business is in its own dire straits, and Riggio’s buyout would need to be more turnaround than takeover.

Regardless of how that deal turns out, the Nook will be going through a lot of changes over the next year. Management is set on cutting back on costs and inventory, in effect paring the business back to focus on content. As CFO Michael Huseby explained on the call, the Nook business is debt-free right now, but it has payments it still needs to make to Microsoft. That non-debt is going to be paid off through digital content sales.

Lynch pointed out the value of digital directly, saying, “Digital content is a profitable business for us. We carry approximately 30% gross margins and obviously has no inventory associated with it.” Compared to the overall business, which generated a gross margin of 25%, it’s an excellent generator of extra cash. That’s something that investors on both sides of the retail-Nook divide need to keep in mind.

The bottom line
While I’ve generally been upbeat about the future of a divided Barnes & Noble, this report set my enthusiasm back. I’m very worried that Barnes & Noble might be doing too little, too late. The value of the Nook business certainly may rest in the digital content, but the Nook branding and technology can’t just be abandoned. I’ll be interested to see how that side of the business gets toned down over the next year. More immediately, I’m interested in what Riggio has to say about the retail business, and where he thinks it can generate extra value for investors. His inside view of things should be eye-opening for everyone.

The article Barnes & Noble’s Dangerous Decision originally appeared on Fool.com and is written by Andrew Marder.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft.

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