January 9, 2012
What on earth is Barnes & Noble (BKS) doing, pondering the spinoff of the division that makes its Nook e-readers and tablets? It’s hard to find a way to “spin” that news into anything resembling an upbeat signal for either Barnes & Noble or its stock.
William Lynch, the bookseller’s CEO, dropped the possibility of a spinoff into a discussion of the company’s prospects last week, even as he revealed that year-end results are likely to fall short of investors’ hopes and analysts’ forecasts.
The idea of the Nook was – and remains – compelling for Barnes & Noble: Someone can wander a store with Nook in hand, choosing to save a few books and a few inches of shelf space by downloading Neal Stephenson’s bulky new novel, “Reamde,” while at the same time picking up a couple of paperbacks to read on the planes when intrusive flight attendants insist that an e-reader does indeed count as an “electronic device.”
But the suggestion to spin off Nook gives the distinct impression that Barnes & Noble can’t make the synergies it touts work as well as in practice as in theory. The development costs of the Nook were sizeable – and added to those was the cost of retrofitting existing bookstores to include carefully designed Nook boutiques. Despite kudos for the Nook’s design and functionality, and more than respectable sales, Barnes & Noble isn’t making enough off the devices. (By one account, the need to keep updating and upgrading software and keep paying for pricey TV ads costs the retailer $200 million plus a year.)
Given the basic principles of fiduciary duty, the only way corporate directors would approve a spinoff is if Nook is either so valuable on its own that investors want to be able to choose to hold that part of the business independently, or is likely to struggle so much that it’s going to put downward pressure on the existing business of selling what in the e-reading world have become known as “dead-tree books.” Either way, that doesn’t say much for Barnes & Noble’s business.
If it spins off Nook at this point, those losses that Barnes & Noble has incurred to date will never be transformed into profits as e-reading becomes more commonplace. Not only that, but Barnes & Noble will have made a public declaration that it is sticking to the traditional formula when it comes to book retailing, even as the publishing industry is the midst of a massive Internet-fueled upheaval.
Barnes & Noble investors may well be impatient to see the full value of the Nook reflected in the company’s stock price, as Lynch suggested last week. But to the extent that it isn’t, they might want to stop and ask themselves why that might be. If the Nook is the killer app that its fans suggest, then why not keep it as part of Barnes & Noble, given the extent to which the two businesses are already linked? And if it isn’t, then why own it at all, either as part of Barnes & Noble or a stand-alone entity?
The lower sales forecasts for Nook ($1.5 billion rather than $1.8 billion), lower revenue outlook and larger loss projections for its 2012 fiscal year may be a great reason to avoid owning Barnes & Noble stock today. What appears to be muddled strategic thinking on the part of management (albeit in response to short-term thinking on the part of their investors) may be a great reason to steer clear of this stock in the future.