Here's a story from SmartMoney.com on our competition:
January 29, 1999
Are Investors Overlooking Barnes & Noble?
By Joseph Epstein
BARNES & NOBLE
LEONARD RIGGIO, chairman and CEO of Barnes & Noble (BKS), must cringe every time he looks at the ticker these days. Sure, his company's stock has climbed a healthy 71% since reaching a 52-week low last fall. But when you compare its performance to the stock of archrival Amazon.com (AMZN), Barnes & Noble looks like it has barely moved at all.
Of course, next to Amazon, the performance of almost any stock, except its fellow Internet travelers, looks pretty pathetic. But we were drawn to Barnes & Noble for another reason -- its scrappy, online division, barnesandnoble.com. True, Wall Street has known about the parent company's intentions of spinning off barnesandnoble.com for some time, and so that information is undoubtedly priced into the stock. But even for the low-margin book business, Barnes & Noble stock is cheap: Its shares trade at a 0.9 price-to-sales ratio, which was enough to land it on our value oriented Price to Sales Screen.
It's unusual for any stock with even the most tenuous connection to the Internet to land on the Price to Sales screen, which typically attracts companies in sleepy industries that investors have overlooked. But for a high-profile company like Barnes & Noble with an equally high-profile Internet venture to land on the screen is very interesting, indeed. But let's put things into perspective. With $3.1 billion in revenues, Barnes & Noble is the industry leader with approximately 14% market share of the $17.7 billion consumer book market. Yet, the company is more a conventional retailer than an Internet play, with more than 80% of its revenues generated from brick-and-mortar stores. So it's not that surprising that the company is trading at a modest 29.9 times forward earnings, a 25% discount to retail bellwethers like Wal-Mart Stores (WMT) and The Gap (GPS).
While the book industry is growing at 5% annually, Barnes & Noble has been able to sustain a 20% to 25% growth rate through the continued expansion of its superstores. But with online book sales leading the e-commerce revolution, the company is in a conundrum: While barnesandnoble.com may cannibalize its retail store sales, without an online retail site, Barnes & Noble will definitely lose customers to Amazon. Research firm Jupiter Communications expects online book retailers to add an incremental $450 million in revenues this year, while the entire industry is expected to grow by only $1 billion, leaving little growth for the rest of the industry.
BARNES & NOBLE V. AMAZON.COMClearly late to the online game, barnesandnoble.com has been a quick learner as revenue is expected to jump from approximately $65 million in fiscal January 1998 to more than $140 million in fiscal 1999. And barnesandnoble.com has some heavy hitters behind it: The site is the exclusive book retailer for America Online's (AOL) 15 million-plus subscribers and will get a huge boost from German media conglomerate Bertelsmann AG, which recently bought a 50% stake in the venture for $200 million. "Bertlesmann is very savvy in the media world," says J.P. Morgan Securities analyst Danielle Turnof Fox. "They are a partial owner of AOL Europe and know how to compete in this new medium." Indeed, Bertlesmann is the largest book publisher in the U.S. (it owns Random House, Dell, Bantam and Doubleday) and barnesandnoble.com could reap the benefits of some vertical integration.
Additionally, Bertlesmann is the international book club leader, boasting 26 million members, and is hoping to fold its European online book retailing operation into barnesandnoble.com for the site's international push. To prepare the online enterprise for dramatic growth, Barnes & Noble recently purchased the Ingram Book Group, the nation's top wholesaler, in what some analysts feel is a risky strategy. Ingram generates approximately 50% of its $1 billion in revenues from the same independent retailers that Barnes & Noble's superstores are trying to crush as well as approximately 15% or more from rival Amazon, who will likely dump Ingram to set up its own distribution facilities.
However, the acquisition allows both barnesandnoble.com and its brick-and-mortar parent to drop-ship orders overnight to 80% of its customers. In a highly price competitive environment, that kind of service definitely gives barnesandnoble.com an advantage.
But where are the online sales coming from? While Barnes & Noble has scaled down its superstore expansion plans to boost advertising and development spending on its cyber brand, some analysts feel that book clubs, which account for 25% of the industry, will bear the brunt of the Internet's success. After all, during the all-important Christmas selling season, same-store sales for Barnes & Noble's superstores were up a healthy 5.7% as overall (non-Internet) sales jumped 13% over last year. "As long as Barnes & Noble sells more to their existing customers, whether it is through their existing stores or via the Internet, it may not be all that important as long as they can generate a good overall return on invested capital," points out ABN AMRO securities analyst Mark Mandel.
And just as barnesandnoble.com's business is ramping up, Amazon is focusing more on music, video games and videos, as it tries to become the Wal-Mart of the Web. While only six months old, Amazon's music business accounted for nearly 40% of its sequential sales growth during the third quarter and forced leading online music retailers N2K Inc. (NTKI) and CDnow (CDNW) to merge. It's a bit of a long shot, but some analysts wonder if Amazon's wider focus on retailing in general will give a books-only barnesandnoble.com an advantage.
That's certainly what Riggio is hoping for as he plans to take barnesandnoble.com public in the coming months. While Barnes & Noble will now split the profits with partner Bertlesmann, it will also split the losses associated with the online operations. As a result, the company's earnings are expected to shoot from $0.79 to $1.40, according to ABN AMRO's Mandel. Actual earnings -- that's certainly more than Amazon can claim. |
