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Published: September 30, 2010
It's been a nutty summer for the nation's largest operator
of book stores. Soon after Memorial Day, Barnes & Noble
(NYSE: BKS) 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.
At the time, I assumed these men were battling over an asset
that had little interest to any other investors. Perhaps I was
wrong. The
proxy 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.
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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 here, Best Buy (NYSE: BBY) 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 economy
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 to profitability.
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
buyout 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
Staff Writer
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