Few companies have been hit as hard as Barnes & Noble (NYSE:BKS) by the rise of Amazon (NASDAQ:AMZN) and online shopping, and yet the bookseller has still managed to survive. It has lost almost half of its stock value compared to its one year peak and has been reporting constant losses, but many of us can still find one of their bookstores in 30 minutes of driving.
But the latest quarterly earnings report released on Thursday shows just how bad things are. In the 13 weeks ending October 28, 2017, Barnes & Noble reported sales of $791 million and a net loss of over $30 million compared to sales of $858 million and a net loss of $20 million over the same period one year ago. These numbers significantly failed to meet investor expectations and the stock price promptly fell last week before slightly recovering.
The good news is that Barnes & Noble leadership appears to understand that the situation must change, and the company indicated in its earnings conference call transcribed by the Motley Fool that it will be heading in the direction of smaller stores and reemphasizing books. Investors may be worried about how Barnes & Noble will survive in the face of Amazon and online retailers, but there is room in the print industry for both physical and online stores. While investing in Barnes & Noble is risky, investors should not overreact and for now hold the stock.
A Bookstore which sells Books
Walk into a Barnes & Noble these days (yes, I still do) and you will notice how their giant stores appear to be devoting more and more space to board games, collectibles, and other odd things. The company made a reasonable attempt to diversify, but the problem is that no one comes to Barnes & Noble to buy board games. They come to buy books, which means that Barnes & Noble is eventually forced to sell the games at a bargain price and net loss.
Barnes & Noble leadership appear to have finally realized that with this earnings report. CEO Demos Parneros stated in the conference call that “we will place a greater emphasis on books while further narrowing our non-book assortment” and plans to aggressively clear out unsold merchandise.
Another change is that the company intends to downgrade the size of its stores as it announced that it is working on testing smaller formats in places such as Plano, Texas and Ashburn, Virginia. This is another good change. Barnes & Noble has stubbornly insisted on clinging to large stores located throughout the country with overpriced property deals, an antiquity in a world where so much is sold online. But given that the company keeps short leases, it should be able to transition to smaller stores within a few years, reducing rent expenses and make their store appear more personable.
Staying Relevant
Barnes & Noble is making good decisions in the aftermath of its earnings report, but some investors may argue that this is putting lipstick on a pig. Everyone knows that Barnes & Noble is just another retailer which is struggling greatly against the rise of online shopping in general and Amazon in particular. How will it survive against the march of technology?
Barnes & Noble will undoubtedly continue to be pressed. But there is no reason to assume that it will go extinct, and its adaptations indicates how it will continue to survive. Physical bookstores do have advantages over ordering things online. They are more kid and family friendly, you can talk to a clerk for recommendations, and you can get a book faster from a store than waiting for a delivery. Barnes & Noble seems to be aware of these advantages, as they stress the importance of how their customer service helps wins over customers as well as increasing membership.
And despite the rise in e-books, Publisher’s Weekly noted earlier this year that print books have increased in sales since 2014, indicating that there is room for both Amazon and Barnes & Noble to succeed. Barnes & Noble will have to reinvent itself in order to survive, but that is exactly what it is doing.
A Crucial Winter
This winter will be key in determining Barnes & Noble’s long-term viability. The bookseller states that sales declined compared to last year because there were no books out last quarter comparable to the popularity of Harry Potter and the Cursed Child. But as Parneros stated in the conference call, Barnes & Noble has a strong lineup this holiday season with books from Tom Hanks, Dan Brown, and John Grisham among other popular writers. If this statement turns out to be correct and Barnes & Noble turns out to have a good holiday season, then investors should consider buying into this stock. It is too soon to tell whether the bookstore’s reinvention will succeed. But while the poor quarter indicates that investors should not buy right now, do not assume the worst. Barnes & Noble is not dead yet.