FYI: Part of June Fortune magazine article about BKS Vs. Amazon.
Money manager William Harnisch argues that Barnes and Noble's true value is $45 a share, about 60% higher than its current price. With short term traders sell off during the BNBN IPO period, we should have seen the bottom at 27.
In late May, the first stage of this transformation was complete: Barnes & Noble sold 18% of barnesandnoble.com to the public (the remainder is owned equally by Barnes & Noble Inc. and German media conglomerate Bertelsmann AG). So far, barnesandnoble.com, with sales of $62 million last year, has been no match for Amazon.com--but again, there's nobody better than Riggio when it comes to expropriating a competitor's good idea. Just ask Louis Borders, who with his brother Thomas founded Borders in 1971 (and sold it to Kmart in 1992). "We had 25 stores when he came in," recalls Louis Borders. "Then he opened a store that looked very much like ours--it was amazing. Now he's doing the same thing with Amazon. He's not a copycat; he's a great entrepreneur."
Riggio has other things working in his favor. For one, Amazon seems to be losing interest in books. It is becoming the Wal-Mart of the Internet, selling not only books but music, videos, gifts, and greeting cards; holding auctions; and offering links to online drugstores and pet supplies. Riggio sees opportunity here. As Amazon broadens its scope, barnesandnoble.com's narrow focus--its commitment to books--could be a competitive advantage. In other words, if barnesandnoble.com positions itself as a community of book lovers, it may be able to beat Amazon in the field of books (irony of ironies to out-of-business independent booksellers).
"I think if we are focused on being the best at what we do, we will earn a larger market share," barnesandnoble.com's CEO, Jonathan Bulkeley, recently told the Motley Fool, a financial Website (barnesandnoble.com was launched by Len's brother Stephen, now Barnes & Nobles's vice chairman). "[Amazon] was first to market, and they grabbed market share first, but there are millions and millions and millions of people who've never bought a book online or a CD [online] and who will be coming online to do [so] within the next 12 to 36 months." To those people, the Barnes & Noble name is powerful; it stands for books.
And what of Barnes & Noble stores? What will become of them now that growth is slowing? "Hey, we're doing really nicely right now," Riggio told me the day before this story went to press. "Are we afraid? No! Are we concerned? Uh, well ..." Riggio went on: "All I can say is, look at the record of what we have done. We have met every single five-year plan we have ever submitted to the banks, to the public, to our shareholders."
Riggio acknowledges that eventually the Internet will capture between 2% and 5% of his stores' sales. That may sound like a small matter, but in the languorous book market, 1% here and there is a big deal indeed. Riggio states plainly that one way or another, he intends to make up any loss to the Internet. Increasingly Barnes & Noble stores are selling impulse items that carry higher margins than books--things like reading glasses, miniature night-lights, and Godiva chocolates. Barnes & Noble already sells music; Riggio suggests that DVDs--movies on CD--might be next. Then there are digital books. Last year Barnes & Noble bought 20% of tiny NuvoMedia, maker of the Rocket eBook, a hand-held gadget that looks like a Palm Pilot and holds up to 4,000 pages of words and images. Barnesandnoble.com now sells Rocket eBooks ($499) and a growing number of RocketEditions, electronic books that can be digitally downloaded.
A decade ago Riggio foresaw the decline of the great American mall; therefore, he began closing his mall-based B. Dalton stores and opening Barnes & Noble superstores instead. It is not inconceivable that a decade from now his superstores, too, will be relics. But that's probably far too drastic an assessment. Surely there will always be a place for bookstores made of brick and mortar--and Barnes & Noble is the biggest bookstore chain in the country.
For that reason, money manager William Harnisch, whose Forstmann-Leff Associates owns 14% of Barnes & Noble, argues that the bookseller's true value is $45 a share, about 60% higher than its current price. He also argues that Lenny Riggio is undervalued. "This guy Len, he's really something. This guy knows how to make money. The problem is, he doesn't look like an investment banker, so he doesn't get credit. He's way underappreciated."
Peter Farago, who has known Riggio since the early days of Barnes & Noble, agrees: "Look, Lenny's going to be just fine. He's got a killer instinct. When it's clear what has to be done, get out of the way. The guns of Navarone get trained on whatever has to be taken out."
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