Barnes & Noble, Inc. (NYSE:BKS) is the largest bookstore chain in the United States, with a total of over 1,300 bookstores in all 50 states as well as a substantial online presence. The consensus in the market has been negative for quite some time, despite the company’s best efforts to adapt to the online bookstore and e-reader trends. As a result, shares have declined in the past couple of years, bottoming out at under $10 per share. Even the current share price of around $14 is a far cry from the above-$40 levels the stock was at just a few years ago.
However, I’m not so sure that the best days are behind Barnes and Noble. If this company was such a loser, why would Microsoft Corporation (NASDAQ:MSFT) sink $300 million into Barnes and Noble’s digital book ventures? If the physical bookstores are a dying business, why were same-store sales actually up in 2012? While the profitability and viability of this company still remains to be seen, I have a feeling that those investors willing to take a chance on this one will be glad they did.
As far as physical bookstores go, there is no comparison. Barnes and Noble is the clear leader in this department, especially now that Borders is no more. They have also proven themselves to be very adaptable to the changing times.
The closest competitor in terms of a physical bookstore chain is Books-A-Million, Inc. (NASDAQ:BAMM) with their 257 stores. While the company has established an internet presence, they did not adapt to the e-reader trend, nor are their stores as appealing as Barnes and Noble’s. As a result, their revenues have declined every year for the past five years, while Barnes and Noble’s have risen.
Two areas where Barnes and Noble has a competitive advantage (and room for growth) are its B&N College subsidiary, which accounts for 24% of the company’s revenues, and the NOOK division (13%).
The college division operates almost 700 college bookstores, and is growing quickly. In fact, while I was in college, our bookstore became a B&N College store, which I didn’t mind at all since it brought its Starbucks café with it. With approximately 4,500 colleges and universities in the United States, there is tremendous growth potential here. According to the company’s most recent annual report, “College is well positioned to be a growth business for us as colleges and universities increasingly outsource their distribution of campus materials.” Even if physical book sales die out, college students will continue to go to the bookstores for textbook rentals (a very high-margin business) and for non-book items such as college apparel.