The e-commerce revolution has done a number on plenty of retail niches, but few have suffered as thorough a routing as bookstores. Barnes & Noble (NYSE:BKS) is still standing, of course, but what it isn’t doing is growing. On Thursday it produced its fourth-quarter report, which featured virtually flat sales and a guidance cut for full-year earnings. And that was with the bright spot of comps sales growth of 1.1%, the best it has managed in years.
In this segment from the Market Foolery podcast, host Mac Greer and senior analysts Ron Gross and Jason Moser discuss what it might take to put this — still profitable — bookseller back on track; how it could get its footprint right; the direction of the business; the model Amazon is using for its own brick-and-mortar bookstores, and more.
A full transcript follows the video.
This video was recorded on March 7, 2019.
Mac Greer: Speaking of bad days, Barnes & Noble. Wow! They may want to hang out with Kroger at the bar. Shares of Barnes & Noble down around 12% on earnings. Sales were flat for the holidays. Barnes & Noble warning that full-year earnings will be weaker than expected. That’s not good. But there was some good news. Same-store sales up 1.1%, which the company said was its best quarterly performance in several years. I’m trying to square that.
Ron Gross: That was going to be my lead! Therein lies the problem! 1.1% was their best performance in years! [laughs]
Greer: That’s considered flattish for the holiday quarter. Is it that bad? Is it 12% down bad?
Gross: The guidance going forward is what’s killing the stock. Let’s not forget, the company still is profitable. Even with the lowered guidance, they’re going to do $150 million in EBITDA, probably, on an annual basis. It’s just, what are you going to pay for that from a stock perspective? You have a company that is constantly, I mean, the fifth CEO in six years, we’re looking for right now. It’s tough.
They do have a special committee that’s looking at offers that people have made for the company, including former founder Leonard Riggio. It’s a struggling business. I think there’s a place for brick-and-mortar bookstores still, you just have to get the footprint right and you have to get the number of stores right. Then you can have a nice little business. The emphasis is on “little” here. Right now, you have the stock trading around four times EBITDA. Theoretically cheap, but not if guidance is going to continue to be cut downward.
Jason Moser: Yeah. Another dynamic that plays into that — I agree, I think there’s a space for bricks-and-mortar bookstores. I even still like going, and I’m a Kindle guy, really.
Greer: I was there last week. I love, love, love being in a bookstore!
Moser: I do, too. When Amazon started building out those little brick-and-mortar bookstores here and there — and they don’t have many of them, they have them here and there — the one thing that they are able to do is, they’re able to use the data that they get from their readership, whether it’s Amazon or Goodreads. They can basically cater those stores to what they know people are going to be reading. So they can maintain a much leaner cost structure on those stores that they own.
Barnes & Noble, that’s always been one of the biggest places you’ve ever been to. You walk in there and just get lost.
Gross: Three floors.
Moser: I love it!
Gross: Maybe stumble on a Starbucks.
Moser: [laughs] I could be in that store all day long and never get bored. But it costs a lot of money to maintain that presence.
Greer: The cat calendars alone. There’s a whole aisle of cat calendars.
Moser: I think you’re seeing a little bit of a resurgence for the mom-and-pop bookstore, the bricks-and-mortar bookstore. Barnes & Noble has continued to hold brand recognition in that space. If they can right-size the cost structure of the business, it may not be the best growth opportunity in the world, but like Ron said, there’s a space for it.
Greer: Let’s talk about that a bit more as we wrap up. We are a show for investors. If I’m an investor, if I’m looking at this stock, I’m looking at Barnes & Noble, do they have to get more people into the stores? Or, as you say, do they have to basically radically change their business model and move toward online, which hasn’t worked in the past for them that well? How do they get people in the stores?
Gross: They have to have an online presence. People still go to the stores. They’re still profitable, let’s not forget.
Greer: But they need more people.
Gross: They need less stores and the stores don’t need to be as big. Nationalize the operating cost structure, maintain your profitability, and just settle on being a nice business, not a huge growth business, but a nice business that could generate relatively stable cash flow on an annualized basis.
Moser: I’ve got the answer. You just partner up with Costco, sublet a little space in every Costco around the country.
Greer: I like that!
Moser: Boom! Problem solved!
Greer: Or Dave & Buster’s, maybe?
Gross: [laughs] Not so much.
Moser: I’m more of a Costco guy.