When a company says they are looking at a “strategic committee to evaluate the sale of the retail business,” you know things aren’t going well. Barnes & Noble, Inc. (NYSE:BKS) has been battered and bruised for a while by competition from Amazon.com, Inc. (NASDAQ:AMZN), but the company is also losing sales to places like Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) as well. If a customer wants to buy a physical book, and they can find the item at a superstore, why make the extra stop at Barnes & Noble? With the increasing popularity of tablets and e-readers, why buy a physical book at all?
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That being said, there appears to be value in Barnes & Noble, Inc. (NYSE:BKS) that investors are missing. With overall revenue down 8.8%, and same store sales down 7.3% in the retail business, there doesn’t appear to be much to like about Barnes & Noble. However, there is actual opportunity here–it just depends on which way the company chooses to go.
One piece of information I picked up on was the company’s commitment to build the NOOK business and “significantly reduce expenses.” The best way to reduce expenses in the NOOK business would be to trim the significant fat in SG&A expenses. In the current quarter, the NOOK business spent 41.17% of their revenue on SG&A. By comparison, the company’s overall SG&A expense as a percentage of revenue was 22.22%.
Among Barnes & Noble’s competition, only Amazon.com, Inc. (NASDAQ:AMZN) spends as much in SG&A, at (ironically) 22.22% as well. Target Corporation (NYSE:TGT) and Wal-Mart are both more efficient operations, with SG&A at 19.19% and 18.13% of revenue, respectively. As you can see, with NOOK spending significantly more on SG&A, there is a real opportunity here.
By my calculations, if the NOOK business cut their SG&A spending to 22% (in line with the rest of the company), this would save about $65 million. The affect this $65 million would have on earnings would be profound. With $65 million in lower expenses, Barnes & Noble, Inc. (NYSE:BKS)’s EPS would have actually increased 42% to about $1.01 per share.