What Do Raiders See in Barnes & Noble?

Not much is left of Barnes & Noble (NYSE: BKS). Its bricks-and-mortar model has been ravaged by online competition. Its Nook e-reader trails well behind the Amazon.com (NASDAQ: AMZN) Kindle and also competes with tablet PCs from Apple (NASDAQ: AAPL) and Samsung. None of that matters to Jana Partners, which took a 11.6% stake in Barnes & Noble for reasons that are mysterious.

Ron Burkle’s Yucaipa also tried to “increase shareholder value” at the bookseller. As an investor, it has pressed the company to sell or restructure itself, without success. John Malone’s Liberty Media invested $204 million in Barnes & Noble in August 2011. None of these actions have helped the firm’s stock price much. Even after a rise of 18% on the Jana news, shares trade at $13.41, well short of a 52-week high of $18.73.

Barnes & Noble made only $52 million in the quarter that ended January 28. That was down from $61 million in the same quarter a year ago. Revenue was up 2% to $2.4 billion. B&N.com has revenue of only $420 million and a loss of $102 million. It is impossible to claim that the Internet is a good business for the company now, particularly when the online numbers are put against Amazon’s.

In a disclosure about its online business, Barnes & Noble reported:

B&N.com selling and administrative expenses increased as a percentage of sales to 34.1% from 25.3% during the same period one year ago. This increase was primarily attributable to an increase in advertising costs, higher legal fees and additional resources hired over the past year to support digital growth.

That is hardly what investors want to read.

Barnes & Noble management has suggested that it might spin out its Nook and e-book businesses. Somehow this is supposed to improve prospects for the company’s shareholders. But the Nook has only 27% of the e-reader market, to the Kindle’s 60%. That calculation does not include the effects of tablet PCs like the iPad, which increasingly are attached to their own e-book stores.

There is a reason that Barnes & Noble trades well below its 52-week high despite interest by raiders. Barnes & Noble is not worth more than the stock market believes it is.

Douglas A. McIntyre