By Richard CollingsNEW YORK ( The Deal) -- As Barnes & Noble ( BKS) was seemingly stymied in its comeback attempts -- after Chairman Leonard Riggio said Tuesday he was putting a possible takeover bid for the company he founded back on the shelf alongside dismal fiscal first-quarter results -- a way out of its bricks-and-mortar quandary might be found by looking north. Canada's largest bookstore chain, Indigo Books & Music, was once in a similar situation, according to Hilco Organization's SD Retail Consulting President Antony Karabus. Like Barnes & Noble's Nook e-reader, Indigo had tried to go up against the big boys in the field -- Amazon ( AMZN) and Apple ( AAPL) -- only to have development costs for its e-reader business, Kobo, drain the company's cash. But when Indigo sold Kobo to Tokyo-based Rakuten for $315 million in November 2011, it gave the company a cash infusion, which it used to transform from primarily a bookseller to more of a lifestyle retailer, selling in complementary categories such as home accents and children's learning, Karabus said. And Rakuten got a win from the deal because the Japanese online retailer could take the Kobo e-reader international and compete in less-saturated markets overseas. The Nook, similarly, could benefit by also being introduced into new markets, rather than focusing all its marketing efforts on the intensely competitive U.S., where it is going up against Amazon's Kindle and Apple's iPad, Karabus said. Right now, all that Nook signifies for Barnes & Noble is an "albatross," as Janney Capital Markets analyst David Strasser put it in a research note Tuesday. "NOOK continues to be a drag on the company, with a sales decline of 20% and adjusted
Ultimately a sale of Nook would not only infuse the company with much-needed cash, but also free the company to concentrate on its core brick-and-mortar business. But with all the talk around e-readers, luckily for booksellers such as Barnes & Noble, people still like to shop at book stores, Karabus said. And the sale of e-books is actually beginning to flatten. It turns out, physical books are still a very good technology and cheap to produce. Coupled with the company's strong performance in its college business, Janney Capital's Strasser said the stock could become attractive again. However, physical books are not able to support entire stores, Karabus said, and Barnes & Noble still faces competition from Amazon's hefty online sales of the same. Instead of having bookstores with 25,000-plus square foot of books, retail stores should have about 15,000 square feet, with blocks of square footage devoted to other categories, he said. Promising categories in addition to children's learning and home accents include gifts and arts and crafts, he said. In Barnes & Noble's favor is its strong trusted brand name, Karabus added, as well as its great store locations and high foot traffic. The trick is to transform the business, switching to categories more interactive and less vulnerable to e-commerce. What Barnes & Noble should be looking for is items that have a higher margin than books, Karabus said, citing a retailer like Paper Source, which is backed by private equity firm, Brentwood Associates, and has made a successful business out of selling fine paper and stationery. Besides selling relatively high-margin products, the company offers classes on crafting and areas for people to try out crafting tools, which it also sells. But while a strategy of branching out into other retail categories worked for Indigo, it does not come without risk. Books are sold on consignment, so there is little margin or inventory risk. Any books not sold are returned to the publisher. By switching to new product categories, suddenly Barnes & Noble could be stuck with inventory, as well as all the costs associated with buying inventory in the first place, all of which requires more working capital, Karabus said.
Yet, since Indigo sold Kobo, its stock price has rebounded to trading close to its 52-week high at C$11.24 ($10.82) per share Tuesday from C$6.47 per share back in the beginning of November 2011. For Barnes & Noble, time is of the essence, as its fiscal first-quarter results had sales down 8.5% from a year earlier, to $1.3 billion, and an EBITDA loss of $8.9 million. The only unit that was up for the U.S.'s largest bookstore chain was its college bookstore unit, although it was due to the college unit and investment in digital education, for which the company blamed the EBITDA loss. The retail segment, consisting of bookstores and its online outlet, BN.com, generated $65 million in EBITDA during the quarter, proving to be its most profitable unit, although that number is down by $12 million, year over year. The company ended the quarter with $73 million in cash. Along with first-quarter results, Barnes & Noble's Chairman Leonard Riggio, who owns a 29.8% stake in the bookseller, said he was suspending his effort to acquire the company's retail operations. Barnes & Noble operates 674 bookstores in 50 states and a large e-commerce site. Its college unit operates 692 bookstores serving more than 4.6 million students and faculty members.