Barnes & Noble Split – Why Have One Bad Company When You Can Have Two?

Popular Posts: Apple Stock Has Gotten Too Far Ahead of ItselfShould I Buy Apple Stock? 3 Pros, 3 ConsNo Merger? No Reason to Buy Sprint Stock, TMUS Recent Posts: Barnes & Noble Split – Why Have One Bad Company When You Can Have Two? Apple Stock Has Gotten Too Far Ahead of Itself 3 Media Stocks to Buy Now View All Posts Barnes & Noble Split – Why Have One Bad Company When You Can Have Two?

Shares of Barnes & Noble (BKS) jumped nearly 5% Wednesday after the beleaguered bookseller announced plans to separate its retail business from its Nook e-reader operation.

However, it’s a strategy filled with enough magical thinking to wow Harry Potter.

Nook & Retail – Two Bad Businesses

First, let’s take a look at Barnes & Noble’s retail business, which operates about 700 stores.

Same-store sales have slumped for six straight quarters. And somehow, the company’s performance in that key retail metric is much worse than it seems. B&N’s results have been inflated for the past couple years after longtime rival Borders went out of business, and more recently, the runaway success of Fifty Shades of Grey helped propel sales.

Barnes & Noble can only get lucky like that so many times.

Then there’s the floundering Nook business. While it’s true that BKS has been talking about spinning off Nook since 2012 and even got Microsoft (MSFT) to put more than $600 million into the business. Nook lost about $56 million on an EBITDA basis in the latest quarter — even as it unveiled plans to partner with Samsung (SSNLF) to market a co-branded line of e-readers. (One of many reasons why no one was surprised that Nook laid off employees earlier this year.)

No Love for BKS

Many of the people who know BKS the best are leaving the company’s shares on the discount rack and not looking back. Liberty Media (LBTYA) is a case in point. John Malone’s company offered to buy the bookseller for nearly $1 billion in 2011, only to change its mind. Instead, it acquired $204 million in preferred shares — an investment which the company announced in April that it would mostly unload.

B&N founder Leonard Riggio also abandoned his plans to ride to the financial rescue.

The problem that has dogged Barnes & Noble and will continue to do so is that its main rival Amazon.com (AMZN) is an uneconomic competitor who is willing to operate on a razor-thin profit margins. Analysts have insisted for years that CEO Jeff Bezos sells his company’s Kindle e-readers at or below costs with the hopes of making up for that shortfall by selling them high margin e-books. AMZN continues to rule the e-book kingdom.

Unfortunately, that’s less of a prize than it used to be.

Demand for e-books is slowing down from its torrid pace of 10 years ago. As demand declines, prices will drop and competition will intensify, which means lower prices for readers and lower profits for BKS.

Because AMZN has its fingers in so many pies, declines in e-book prices will only pinch profits slightly. However, for B&N, the “pinch” will be more like a sleeper hold from which there is no easy escape.

About the only ray of sunshine in the bleak outlook for BKS is its college business, and that doesn’t count for much.

During the latest quarter, Barnes & Noble’s college business brought in about $298.3 million in revenue, second only to the company’s retail business. Moreover, it earned $14 million in profit — an impressive 272% improvement year-over-year.

But that wasn’t enough to off-set the 0.8% drop in the retail business and the nearly 69% decline in Nook.

Bottom Line

For those tempted to buy stock in ether Nook or Barnes & Noble Retail, I have a suggestion: Make sure you get a stock certificate, place it in your desk drawer, then keep it in there for the next 10 years.

Because it might gain value as a collectible. As an investment, it won’t do squat.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.