Stock of the Day
Aug 31, 1999
Barnes & Noble: A Bricks and Internet Play
by Adam Lowensteiner 8/31/99
Investors of Barnes & Noble (NYSE:BKS - news) thought the
spin-off of the Internet arm would produce a better stock price
for the parent company, but that has not been the case.
Since barnesandnoble.com (NASDAQ:BNBN - news) went public on May 25, shares of Barnes &
Noble have sagged 13% lower, and even struck a 52-week low earlier this month at $20.06 a
share, before rebounding to close Monday at 23.81. So much for the sum of the parts theory, huh?
Maybe not.
Barnes & Noble, the largest book retailer, just reported a robust second quarter, surpassing analyst
estimates. In fact, it actually made money, something typically reserved for the fourth quarter holiday
season. The company earned $0.13 a share, more than double the $0.06 per share estimate,
according to First Call.
The main reason for the positive earnings surprise: Same store sales in the company's superstores
climbed 6.6% in the quarter, while analysts were estimating growth of "only" 5%. Although
comparable store sales growth was only 1.6 percentage points better than analyst estimates, it
heavily boosted the top line.
Barnes & Noble's total sales increased 9.8% to $727.2 million for the quarter. However, Barnes &
Noble's superstore sales have become the main generator of the growth, accounting for 87% of total
sales, up from 84% a year ago.
The company's mall-based stores, which go under the moniker B. Dalton, saw its comps fall 0.5%,
in line with analyst expectations. Although negative comps are not a good sign, B. Dalton comprised
only 13% of Barnes & Noble's total quarterly revenue, down from 16% it represented last year.
Leading the revenue in the quarter were topics like science fiction, political science, religion, and
children's books. Some specific titles in these areas were George Stephanopoulos' 'All Too Human,',
Michael Isikoff's 'Uncovering Clinton,' and Dalai Lama's 'The Art of Happiness.'
Looking ahead, the company has been building infrastructure to help mesh its retail and online
operations. The company just completed its BookMaster product, which is an in-store type of card
catalogue. The BookMaster systems links by computer all Barnes & Noble stores, as well as all the
books and inventory found at its online store, bn.com. By launching this service, Barnes & Noble is
giving customers access to the same amount of titles as online users, which has millions of titles in
inventory.
At the same time, barnesandnoble.com is expected to open a new 600,000 square foot facility next
spring, which will be able to quicken delivery time. The facility will be in Memphis, home of Federal
Express (NYSE:FDX - news) .
BookMaster could prove to be very lucrative to Barnes & Noble, especially going into its strongest
time of the year. By having access to bn.com, store customers can find and purchase titles which
they are unable to find in the stores. Essentially Barnes & Noble is trying harder not to turn any
customer away. Also, any purchases made over the Internet can be returned to a retail store, making
life a bit easier for bookworms.
Meanwhile, the stock right now seems cheap.
For one thing, its stake in barnesandnoble.com is worth about $14 a share. Barnes & Noble
retained a 41% stake in its web subsidiary, which sports a market value of $2.5 billion. That
valuation is 47% above the $1.7 billion the market gives the retail business, despite the fact that the
brick and mortar business has $1.9 billion in total assets.
But the Internets are reaping higher multiples in general as a result of their faster growth rates. That
said, barnesandnoble.com saw its sales rise 243% in the second quarter, earning $39 million.
Most analysts are recommending shares of Barnes & Noble. But there seems to be two distinct
ways to value the company--either as an asset play or as a stand-alone play. According to
Prudential Securities' Amy Ryan, the shares are worth $40, because after backing out the bn.com
stake, Barnes & Noble shares trade for just 5-6 times core earnings per share.
Another way at valuing Barnes & Noble is by looking at only the retail earnings, which John Glass of
Deutsche Banc Alex Brown believes will be $1.80 a share in the January 2000 fiscal year. At $25 a
share, that leaves the stock trading for just 14 times that estimate.
Either way, the stock seems cheap, analysts argue.
What's more, if Barnes & Noble can improve its top line and margins with the new BookMaster, the
company could enjoy the best of both worlds-as both a fast-growing bricks and mortar company as
well as a lucrative online operation.
Bottom Line:
With the company creeping closer to the holiday season with solid top line growth, the market
should hit the books come this fall.
Nice that someone else is seeing the value!!
Regards
Neil |
