It's been a nutty summer for the nation's largest operator of
book stores. Soon after Memorial Day,
Barnes & Noble (
delivered the sobering news that sales and profit targets would not
be met. By late July, shares had fallen all the way down to $12 --
a -50% plunge in less than three months. With the smell of blood in
the air, activist investor Ron Burkle made a hasty play for the
company, hoping to gain control of this once-mighty retail titan.
In early August, I looked at the battle between Mr. Burkle and
Barnes & Noble's founder Len Riggio, questioning whether there
was even any real value left for this storied name. [See:
Don't be Fooled by Barnes & Noble's Desperate
At the time, I assumed these men were battling over an asset that
had little interest to any other investors. Perhaps I was wrong.
battle has just concluded (with Mr. Burkle coming away
empty-handed), yet Barnes & Noble has said that up to 20 other
investment firms have expressed preliminary interest. In October,
the bidding process will heat up as those preliminary feelers
translate into actual offers.
So what's Barnes & Noble worth? Well the table below shows us
how shares trade relative to other large retail chains.
Before trying to figure out what shares would fetch in an offer,
a few quick items are worth mentioning. Current sales growth for
Barnes & Noble is around +20%, but that is misleading because
last year's results did not include the recently acquired Barnes
& Noble college bookstore chain. In the most recent quarter,
sales at barnesandnoble.com rose +42% to $142 million, but the core
base of bookstores saw sales fall -2% to $1 billion. So sales at
the main business are continuing to slump, even as other retailers
on this table continue to eke out positive gains.
In addition, this is not a very profitable business -- operating
margins are a meager 1.2%. Just a few years ago, Barnes & Noble
handily posted 5% or 6% operating margins, but those days are
likely gone forever as e-reader book sales start to cannibalize
business at the brick-and-mortar stores. In fact, it's unclear that
Barnes & Noble will even be able to generate net profits in
coming years, unless the company seriously prunes its store base.
Yet it's clear that the business is quite undervalued on an
enterprise value-to-sales basis (EV/Sales), sporting the lowest
ratio. (EV/Sales is a handy measure of what each dollar of a
company's sales is worth to investors.) Of those five stocks listed
Best Buy (
actually appears to be the best value thanks to a combination of
decent operating margins and a still-low EV/sales ratio. For Home
Depot, the measure is fairly high, which partially reflects strong
profit margins and also anticipates an eventual strong sales
rebound when the housing sector turns up. No such upturn is
expected for Barnes & Noble.
To be sure, all of these retailers are trading at somewhat
depressed levels relative to historical norms. When the
is again on firm footing, these EV/sales ratios may all move above
1.0. In that context, potential acquirers of Barnes & Noble may
be looking ahead to the days when the entire pack is in better
favor. But these potential buyers have their work cut out for them.
They'll need to either boost sales at each store -- perhaps
expanding the line of goods sold beyond books and music, or they'll
have to take a hatchet to the company's cost structure to return it
Barnes & Noble founder Len Riggio has made it clear that he
still thinks this is a richly-valued asset. He has allegedly
previously rebuffed a $25 a share offer from Mr. Burkle in 2009.
It's unlikely that any future bids would be at or above that mark
-- especially as the company's sales and profit outlook have
weakened over the course of 2010.
Action to Take -->
Shares have likely found a floor here, now that Barnes & Noble
is in play. The shares could move past the $20 mark as the
rumors begin to swirl, so this might be a nice short-term trade
ahead of a presumed bidding contest that is set to begin in
October. But you shouldn't expect massive gains, and if shares move
into the low $20s, you should book profits and move on.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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