One theory about a recession is that people will not buy cars or refrigerators, but they will buy beer, razors, soap and books. If you can't ride around in a new Chevy, at least you can read about someone who is.
That theory went out the window, at least in part, when Barnes & Noble (NYSE: BKS) said its same-store sales were down -- a lot.
Last year, the nation's largest book seller made a little money in the quarter ending November 1. It was a very little, $4.4 million. This year, BKS lost $18.4 billion as same-store sales fell 7.4%. Barnes & Noble also dropped its forecast for the next quarter.
The BKS earnings news is particularly bad as the holiday season begins. Companies that sell discretionary items for under $30 have probably hoped that they would benefit, perhaps only modestly, from consumers looking for relatively cheap gifts for grandpa and the kids.
Even cheap is looking expensive this holiday. Although there is Barnes & Noble stock. It is only $12.25 a share.
Barnes & Noble (NYSE: BKS), a bookseller that competes with Borders Group (NYSE: BGP), Amazon (NASDAQ: AMZN), and retailers that stock books such as Wal-Mart (NYSE: WMT), did not do well during the third quarter. Total sales decreased over 4%. A GAAP loss of $0.34 per share was reported versus a GAAP profit of $0.07 per share in the year-ago period. On an adjusted basis, the loss of $0.21 per share missed the call by $0.05, according to this source.
Okay, is it me, or do these numbers basically broadcast loud and clear that Barnes & Noble is not worth one penny of your investment capital? Besides the above, same-store sales took a big dive of 7.4%. That should be the last nail in the coffin of the current Barnes & Noble story, one that reads like a Stephen King novel. Actually, though, it isn't. Another nail to add would be the fact that guidance has been adjusted lower by management. Now, according to CEO Steve Riggio, gross margins are doing okay. I'll skip that chapter, though, as there isn't much substance to it. Who cares about the gross margin at this point. With traffic down and probably due to get worse, a positive tale of the gross margin isn't going to make me want to buy Barnes & Noble as a value play.
According to Yahoo! Inc (NASDAQ: YHOO), the Wall Street Journal reported that a severance plan investor Carl Icahn said is "excessively expensive" would come into play if Icahn is successful in his plan to take control of the company's board; Yahoo! maintained that the plan is structured to prevent Yahoo! from altering or dismantling it while under a proxy challenge.
The Financial Times reported that Lehman Brothers Holdings Inc (NYSE: LEH) almost reached a strategic deal with a group of Korean financial institutions as part of its recent capital raising initiative, and the investment bank may still sign an agreement with the Korean companies this year, inside sources said.
A source familiar with the matter told dealReporter that Barnes & Noble Inc (NYSE: BKS) is conducting due diligence, but has not established whether it will competitively bid for Borders Group Inc (NYSE: BGP). Should Barnes & Noble indicate real interest, the biding process could be delayed, the source said.
OTHER PAPERS:
The Detroit News reported that Ford Motor Company (NYSE: F), in an effort to keep up with changing consumer demand in the U.S., is assembling a plan that will shift entire truck plants to car production.
In what looks to be a pretty desperate attempt to revive its failing business, Borders Group Inc. (NYSE: BGP) has officially cut its ties with Amazon.com (NASDAQ: AMZN) and launched its own e-commerce website. Under the previous arrangement, shoppers at Borders.com had their orders fulfilled by Amazon, with Borders taking a small commission.
Check out the site here. It offers some great incentives to switch over from Amazon -- like free shipping on orders over $25! Oh wait. Amazon and Barnes & Noble (NYSE: BKS) already offer the exact same deal. Never mind.
Borders invested a lot of money in developing a site with no particular competitive advantages. Most Amazon customers are pretty happy with the service they get, and I just don't see any reason for anyone to switch. The duplication of effort probably makes Borders less attractive to potential strategic buyers like Barnes & Noble, which might have preferred that the company pay down debt instead of building another website.
The performance of Borders (NYSE: BGP) has given investors little to smile about. From its 52-week high of $24.15 reached in May, the stock has descended all the way down to $6.35. Back in March the company put itself up for sale with one obvious interested party being Barnes & Noble (NYSE: BKS). I can't see any reason for the company to double-down on bricks-and-mortar retailing.
Now, The Wall Street Journalreports (subscription required), citing an unnamed source, that Barnes & Noble has "assembled a team of executives and advisers to study the possibility" of acquiring Borders.
The Journal adds that "When Borders made its announcement, Barnes & Noble Chairman Leonard Riggio said he would feel compelled to take a look at Borders. But the formation of the team suggests Barnes & Noble is a serious contender."
I'm not so sure about that. Given Borders' status as the number two in the industry and the beating the stock has taken, Barnes & Noble is compelled to look at the company now that it's looking to sell. I question whether the assembly of a team to examine the company means that the company is that serious about an acquisition. It's just a necessary step in exploring an acquisition.
Add in the possible antitrust hurdles of combining the top two bricks-and-mortar booksellers and you have a deal that would appear to be in the very early stages of coming together. It seems likely that the stock will pop on the report, but I wouldn't buy into the hype just yet. The same factors that make Borders unattractive as a stand-alone company combined with its huge debt load may make finding a buyer tough in this market.
When I go to a Barnes & Noble (NYSE: BKS) or a Borders (NYSE: BGP) store, I really can't tell much of a difference. That's not a bad thing – at least for me. Hey, I have lots of choices – and not just books.
But for investors, the situation is a problem. So, instead of fighting, why not B&N and Borders join forces?
Well, according to the Wall Street Journal [a paid publication], there are signs of a possible deal as B&N has put together a team to explore the option.
However, there is a big hurdle: antitrust regulators. The federal government will scrutinize the deal heavily given that Barnes & Noble is #1 and Borders is #2 in the US marketplace.
Barnes & Noble will argue that the market is much different now with online operators like Amazon.com (NASDAQ: AMZN).
Add another log to the LBO rumor fire, because the New York Times's DealBook reports that Barnes & Noble, Inc. (NYSE:BKS) is a ripe candidate to be taken private. Credit Suisse analyst Gary Balter has raised his rating to "outperform" from "underperform," citing the book retailer as "one of the best positioned LBO-type candidates in our universe."
He thinks B&N's shares look pretty cheap, based on the company's consistent cash flow, and promising near-term rate of return.
Word has also surfaced that B&N rival Borders Group, Inc. (NYSE:BGP) could also be headed for an LBO, even though it's less likely. Balter has lowered his rating on BGP to "neutral" from "outperform," presumably due to valuation; the stock's had a nice 33% upside since July.
Buyout speculation has been swirling ever since Pershing Square Capital took positions in both booksmiths. Balter thinks, however, that even though Borders could rebound from its disappointing earnings news last month, B&N has a "better risk/reward level."
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