Barnes & Noble, Inc. (BKS)

[Emerging Growth]

Barnes and Noble (NYSE: BKS) Nook Sales Down

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Barron’s published its list of best stock picks for 2013 last month and the only small-cap to make the list was Barnes and Noble (NYSE: BKS). That was a surprise for analysts and investors alike. BKS has had its share of challenges this past year as it has made the change from its retail format to an essentially Nook format. Earlier this month the company announced disappointing holiday sales figures that seemed to belie Barron’s assertion that the company is poised to offer generous returns in 2013, perhaps at numbers as large as15 to 20 percent. Although the brick and mortar portion of the business now controls almost two-thirds of the country’s retail shelf space for books, BKS announced a year ago that they were trending towards a business centered on its Nook device.

Retail sales from the company’s bookstores and its web site shrank 10.9 percent from the holiday period a year earlier, to $1.2 billion. Perhaps a larger worry for the long-term future of the company is that sales in the Nook unit have declined 12.6 percent, to $311 million. Whenever there is a decline (and in this case such a large one) over the holiday season when sales are supposed to peak, it is a major concern for company execs, analysts and investors. Although the Nook division is losing money some analysts suspect that the loss reflects a market-share grab as BKS attempts to get its Nook units into the hands of as many consumers as possible. Then, the plan is to sell Nook customers more lucrative digital content, including magazine subscriptions as well as books.

On the plus side, BKS appears to have at least several good friends. Microsoft (NASDAQ: MSFT) in particular likes the Nook. The software giant invested $300 million in the company this past October for a 17.6 percent stake in the Nook division. There appears to be another fan in the wings. John Malone’s, Liberty Media (NASDAQ: LMCA) owns $200 million of BKS preferred stock. A few weeks ago British book publisher Pearson (NYSE: PSO) announced that it would pay nearly $90 million in cash for a 5percent stake in the company’s Nook division. It really is quite a good investment for both sides. It gives Pearson another outlet for its books and it also opens up a new market for the Nook. These votes of confidence could go a long way towards calming investor nerves.

It’s no secret that the Nook is in a highly competitive market. In particular, Amazon (NASDAQ: AMZN) has its Kindle Fire and Apple (NASDAQ: AAPL) its ubiquitous iPad. Both companies claim sales are strong. Against such competition that clearly has momentum in the Nook’s niche, perhaps the question should be whether BKS can stay in the digital device business at all. The Nook has been costly to develop and market and BKS does not have the immense financial resources of its competitors. Currently, the company has a market cap of $785 million and is trading at $13.10 per share. This is, without doubt, one to watch.