The deep trouble Borders is in makes you wonder how stable Amazon and B&N are, and what the implications might be for Kindle and Nook.
Amazon is in great health, and Kindle ought to be fine
The Kindle has got Amazon behind it, with nearly a billion dollars a year in annual profits, and $14.162 billion in assets. For all practical purposes, there’s little to worry about. In Q3, 2010, Amazon saw its revenues rise 39% to $7.56 billion, and its net income rose 16% to $231 million.
Given the huge assets, the huge revenue flow, and the increasing revenue and profits, there’s little reason to worry about the Kindle’s future.
There are also the supposedly great Kindle sales – which put Amazon into a great position, where it can make loads of money from ebooks.
What’s the real status of B&N?
2010 has been a very interesting year for Barnes & Noble. On the surface there’s a lot to worry about -
- B&N saw losses.
- Ronald Burkle tried to buy it, and there was an ownership struggle.
- B&N has admitted it’s looking for buyers.
- One of the main investors in Borders tried to get Borders to buy up B&N. Apparently, Borders can’t pay Publishers, but it can pursue B&N.
- There was lots of talk of B&N struggling, and of bookstores being a dying proposition.
However, it’s important to cut through to the underlying facts. The real financials will give us a much better clue as to B&N’s health, and the implications for Nook and Nook Color.
The Financials reveal a quarterly net loss of $12.6 million
B&N is a pretty stable company. Here are some details from B&N’s Q2, 2011 results (this is for the quarter ending October 30th, 2010) -
- Total sales were $1.9 billion.
- Sales from B&N College bookstores were $798 million.
- Sales excluding College increased 1% – This included BN.com sales increasing 59%, and Toys & Games sales increasing 42%.
- EBITDA earnings were $46 million. That’s earnings before things like interest, taxes, depreciation, and amortization.
- Net loss was $12.6 million.
That’s not a very big problem.
If your sales are $1.9 billion, and you’re ending up with a loss of $12.6 million, all you have to do is optimize. Turn an extra 1% of your sales into profits, and you’re in the black.
$12.6 million is dwarfed by B&N’s assets and revenue
Here are a few things to consider -
- B&N has current Assets of $2.1 billion.
- B&N has property and equipment worth $756 million. Note that it’s $2.81 billion minus $2.1 billion in depreciation and amortization. That seems a bit strange – Property and equipment seems like it might be worth more than $756 million. There are 717 stores and over 600 college bookstores. How is that worth just $756 million?
- Goodwill and intangible assets of over a billion dollars.
- It also has current liabilities of $2 billion, long-term liabilities of $1.2 billion, and shareholder equity of $823 million.
- We’ve already covered that it had sales of $1.9 billion in the last quarter.
Not an expert, but it seems that the $12.6 million in quarterly losses is hardly a concern given that B&N has $1.9 billion a quarter in sales, and at least a few billion in assets. This is a company that is unlikely to go under in 2011. In fact, it paid out a 25 cents dividend on December 31st, 2010.
Even B&N’s market capitalization of $823 million seems low. Low enough that buying it might be a steal – which would explain why everyone from Ronald Burkle to Borders’ main investor wants to buy it
B&N has a $1 billion revolving credit facility, with $627 million still available
From the earnings release -
At the end of the second quarter, the company had borrowings of approximately $377 million under its $1 billion revolving credit facility.
The company’s financial position remains strong and the revolving credit facility provides ample room for the company to fund its strategic investments.
$377 million in borrowings isn’t very reassuring. Still, it’s nice to know there’s still $627 million available. B&N is definitely set for 2011, and perhaps for quite a few years after that.
$12.6 milion is dwarfed by what B&N is doing in eReaders and eBooks
The really interesting aspect is what B&N is doing in eReaders and eBooks. Nook and Nook Color are B&N’s crown jewels, and quite possibly 90% of its future.
Here are some estimates and figures -
- B&N expects digital content sales will hit a $400 million per year run rate by the end of fiscal 2011.
- It’s the #2 eReader maker in the US.
- It’s selling half a million Nook Colors a month.
B&N’s Nook and Nook Color business alone are worth a few billion. If Google decided to get serious about ebooks it would have to buy either B&N or Sony’s eReader division.
How much do you think B&N would sell its Nook division for?
Perhaps not at all. Perhaps for a few billion dollars.
B&N’s losses are due to investing heavily in Nook and Nook Color
B&N is seeing losses because it’s put a lot into Nook and Nook Color and into selling ebooks. It’s something it has to do to survive, and is also the smart thing to do – It can’t fight Kindle with physical books. It has, however, fought the Kindle reasonably well with Nook and Nook Color.
B&N mentions that it’s investing heavily in Nook and Nook Color and in ebooks, and that it will continue to do so -
The additional investments are expected to continue and peak during the second half of the year, and then increase moderately in the years ahead. Payoff for these expenses is estimated to begin to appear in the third quarter, when NOOKcolor is expected to be one of the world’s most sought after eReaders, …
B&N also said it had captured 20% of the ebook market. If it can increase this, the investment will be more than worth it.
B&N is investing heavily in the future of books, racking up some minor losses, and setting itself up for profitability in the future. It’s exactly the sort of thing you’d want a company to do - if you had invested in it for the long-term. It’s also exactly the sort of thing you’d hate - if you only cared about your year-end bonus, or were doing short-term trading.
Why would B&N be considering a possible sale of the company?
Not an expert, so please keep that in mind.
Let’s say you’re mining for copper, and you hit a vein of gold. You start to invest heavily in setting up the facilities to mine for gold.
Your investors go crazy. They don’t think the vein of gold means there’s actual gold – Also, even if there is, it won’t be arriving soon enough to meet their year-end goals from their investments. The way they see it – the profits from copper mining are going into building a gold mine, which isn’t going to pan out soon enough for it to be worthwhile to them. They’d rather get instant gratification and see the profits from copper mining go into their pockets.
So they hammer your perceived value. They start saying your mining business is done. Suddenly, its value is a quarter of what it should be.
What do you do?
Well, it’s a huge opportunity for you – You can kick out all these greedy investors, you can get total control of your company, and you can take your company private so no one knows just how much gold you’re making.
That, in my opinion, is what B&N is doing.
Lots of people feel B&N is just exiting the stock market
This thread at the Nook forum has a lot of people that think B&N just wants to get away from the joke that is the stock market.
Here’s a snippet of what flyingtoastr wrote -
BN has been investing heavily in digital strategy over the last twelve months. These short-term costs, while costing a lot in the short-term, will end up helping the company remain profitable, and even increase profits in the future.
BN’s move to put the company “for sale” is most likely a move simply to get the company off of the stock exchange and privately held.
IAmBrad also agrees -
Most likely if B&N is sold, it will be done so in a manner that uses either a buyer or buyers that bear a different name, but are actually funded by the current B&N structure.
B&N sees an opportunity to buy itself for a quarter of its real value. It also sees an opportunity to free itself of all the pains of the stock market – market manipulators, short-sighted investors, Sarabanes Oxley, and so forth. It’s a really smart move for B&N to try and buy itself and go private.
Nook and Nook Color are going to be fine. Even in the extremely unlikely case that B&N goes down – they support ePub, and you can switch to Kobo or Google eBooks.