Amazon Should Buy Barnes & Noble- Part 1

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Amazon should buy Barnes & Noble because its core business has what Amazon does not, profits. 

With the news yesterday afternoon that Barnes & Noble (BKS) CEO William Lynch was resigning from the board and his role as CEO. Shares fell 4% after hours, only adding to the pain that shareholders have experienced over the past month, with shares down 21% despite the 10% rally over the last week. Mr. Lynch's resignation came on heels of its decision to exit the tablet market after its Q4 miss. As fellow contributor and tech expert Ashraf Eassa pointed out in this article, the Nook was terrible for Barnes & Noble.

"Barnes & Noble's Nook division cost the firm $475M in net losses for the entirety of FY2013. To put this loss in perspective, the firm's entire market capitalization sits at a mere $978M. These types of losses were completely unsustainable, and the decision to exit this business was the right one. But the troubling question is why management attempted to attack this business in the first place?"

Barnes & Noble decline was essentially marked by the increase in popularity of Amazon.com (AMZN) with its cheaper books and free two day shipping with Amazon Prime. I mean why would you drive to your local Barnes & Noble when you could get what you wanted delivered to your door while paying less? But I think now might be the time for Amazon to buy the company that is created so much hardship for. That is, I believe Amazon should purchase Barnes & Noble.

Why It Should

Barnes & Noble's current market capitalization is just a shade over $1 billion. According to a Bloomberg article published this February, the stores and the website could be valued at $700 to $1.1 billion, which is in-line with its current market cap. Meanwhile Amazon has a market cap of $125 billion, negative earnings per share, and a forward PE that is mind boggling. As Ashraf Eassa pointed out, Barnes & Noble's core business is still strong. The core being Online and retail plus the College segment.

Despite the firm's core retail business generating significant amounts of EBITDA (retail + online did $374M (+16% Y/Y), college did $111.5M (-3.9% Y/Y)), and factoring out the Nook losses makes Barnes & Noble look quite cheap at these levels. Unfortunately, there are a few issues here:

  1. Retail EBITDA was up 16% Y/Y, but this was driven by a richer mix offsetting a 10% sales decline
  2. College EBITDA was down 3.9% but sales were up 1.1%, implying margin pressure

So why should Amazon buy Barnes & Noble? Well what Amazon really needs right now is profits. Barnes & Noble can deliver some of that, especially after a remodel. For example, Amazon could set up an online purchase and in-store pick up, more importantly it could sell the underperforming stores and the real estate to generate money. With a new "Amazon Store," Amazon could better get its tablets in front of consumers, as well as the rumored Amazon phone. Amazon would benefit from the increased foot traffic as well as the combination of the online store plus the physical store.

Stay tuned for Part II later today or tomorrow!

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