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Barnes & Noble
Wednesday, June 30, 2010
Tags: Retail news
B&N's Trouble in Store
It could be a good book: how a successful entrepreneur running a mature business grapples with the threat of new technology. Unfortunately, it might be tough to come up with a happy ending. At least, that is what observers of Barnes & Noble might think after last week's 21% stock-price plunge. Not only did the company report a sharply higher fourth-quarter loss, it said heavy digital investments would help wipe out free cash flow in fiscal 2011, after a similar result in fiscal 2010.
Chairman Leonard Riggio understandably isn't planning to cede the e-reading market. He plans to use the chain's 1,300 stores to promote its Nook e-reader. Certainly, for the less technologically sophisticated, having someone show them the device should be appealing. But he is picking a fight with powerful rivals Amazon.com and Apple, each of which now sells its own device, operates its own e-book store and has long experience in technological innovation. B&N would be better positioned to fight if it hadn't blown $596 million last year buying the Riggio family's college-bookstore chain. B&N should now end its $1 a share annual dividend, which cost $57 million last fiscal year, to free up cash. Instead Mr. Riggio, whose family owns 32% of the stock, last week said B&N planned to keep the dividend.
The big question is whether B&N will close stores fast enough as physical book sales shrink. Mr. Riggio said last week he didn't expect to close many stores in the next five years, predicting that general retailers would get out of the market first. To survive, Mr. Riggio has to be willing to take more radical action. Only then will readers see an uplifting ending.
Barnes & Noble Chairman Pressed About Company's Poison Pill
Barnes & Noble Inc. Chairman Leonard Riggio told lawyers for billionaire Ronald Burkle that the poison-pill corporate defense that the bookseller deployed to block Mr. Burkle from amassing a larger stake in the company "was about me and my family." It's a key point for Barnes & Noble, which is attempting to defeat a legal challenge by Mr. Burkle to a poison pill that he says unfairly tips the balance against investors seeking change at the bookseller. Among those desired changes is an end to deals that Burkle says benefit Mr. Riggio and other members of the founding family but drain cash from Barnes & Noble. The company enacted its poison pill last year after investor Mr. Burkle expressed displeasure about Barnes & Noble's $514 million acquisition of a college bookstore operation from Mr. Riggio and his wife.
On the stand in a Delaware corporate law courtroom, Mr. Riggio insisted the poison pill is designed to protect the company from investors who are threatening to seize control without paying a control premium. Formally dubbed a shareholder-rights plan, the pill has kept Mr. Burkle's holdings in Barnes & Noble at less than 20%, and, he complains, has barred him from enlisting support among other unhappy shareholders. "Isn't it a fact that the rights plan is all about you and your family?" Burkle attorney Stephen Alexander of Bingham McCutchen asked Mr. Riggio in court. "Not so. It's about the company," Mr. Riggio replied.
Then Mr. Alexander played a video-taped deposition where, in answer to questions about the exemption built into Barnes & Noble's poison pill for the founding Riggio family, owners of more than 32% of the stock, the company's chairman replied, "The pill was about me and my family."
His testimony came on the second day of a Delaware Chancery Court trial over a corporate defensive measure that Barnes & Noble says is nothing out of the ordinary but that Mr. Burkle's attorneys have portrayed as rare in its power to keep upset shareholders in check.
During his turn on the witness stand, Mr. Burkle said he boosted his Barnes & Noble holdings last year, when the stock was too cheap to ignore. In a filing with the Securities and Exchange Commission, he has signaled his Yucapia Co. would be interested in mounting a proxy contest to take on some board seats at Barnes & Noble to push the company toward improved performance.
Barnes & Noble has three directors up for re-election this year: Mr. Riggio, chairman; Michael Del Giudice, an investment banker; and Lawrence S. Zilavy, who is Mr. Riggio's personal financial adviser. Mr. Burkle proxy expert Gregory Taxin testified that, in the case of the big retailer, a couple of big investors could sway the victory to Mr. Burkle's side in a proxy contest. Barnes & Noble's poison pill, Mr. Taxin said, is enough to keep institutional investors from supporting Mr. Burkle if it comes to a fight. Mr. Burkle owns nearly 20% of Barnes & Noble's shares. According to Mr. Taxin, that puts him at a nearly 18% disadvantage starting out in a contest with the Riggios and their allies. In court papers, the company says it fears Mr. Burkle has an important advantage of his own. Aletheia Research & Management Inc., owner of 16% of Barnes & Noble's stock, has followed Mr. Burkle's lead in other investments, according to the company.
Barnes & Noble's chairman on Friday said be viewed Mr. Burkle's involvement as detrimental to the retailer's future. Mr. Riggio said he feared Mr. Burkle would push the company into buying Borders Group, a rival that has seen some financial distress. But it was a joint investment with Mr. Burkle in another company that, according to Mr. Riggio, left him with a low opinion of the billionaire, and drove him to warn him away from buying up more Barnes & Noble stock at a February 2009 meeting at the Bowery Hotel. "I didn't think highly of his judgment and I didn't think highly of him as a partner," Mr. Riggio said in a deposition.
Barnes & Noble Sinks After Forecasting Possible Loss
Barnes & Noble Inc., the largest U.S. bookstore chain, fell the most since 2001 after forecasting a possible loss for the fiscal year because of a $140 million investment in its digital book unit. For fiscal 2011, Barnes & Noble projected breakeven to a loss of 40 cents a share, according to a statement yesterday. Analysts on average had forecast a profit. Cash flow from operations won’t be generated this year because of money invested in its digital book strategy and store improvements, the New York-based company said today on a conference call. “The market is concerned on their investments in digital technologies next year,” said Michael Souers, a New York-based analyst with Standard & Poor’s, who recommends holding the shares. “It’s hard to know how long it’s going to take to monetize the investment.” Barnes & Noble sank $3.14, or 19 percent, to $13.27 at 4:01 p.m. in New York Stock Exchange composite trading, the biggest drop since November 2001. The shares have lost 30 percent this year.
Barnes & Noble has been trying to offset declining sales at its bookstores by investing in its digital book reader, the Nook, and applications to sell e-books. The company said today that its market share of digital books in the U.S. grew to 20 percent from 2 percent since releasing the Nook in November. “This is a real market opportunity and for us to not seize our proportional share of it would be somewhat irresponsible given our position in the bookselling marketplace,” Chief Financial Officer Joseph Lombardi said today in a telephone interview. The retailer expects U.S. sales of trade books to increase 17 percent to $27 billion by 2014 and digital titles to comprise more than 20 percent of that, up from less than 5 percent this year. U.S. digital book sales tripled last year to $313.2 million, as the total market declined 1.8 percent to $23.9 billion. Barnes & Noble cited the growth of its online business, which includes digital books, to reinforce the need for its investment. The unit’s revenue rose 51 percent to $141 million in the quarter ended May 1. Online revenue will increase 75 percent to $1 billion this year, the company said. Barnes & Noble doesn’t provide sales figures for digital books or its Nook reader.
“Digital publishing and digital book selling will soon become the most explosive development in the history of our industry and will sweep aside those who aren’t participating,” Leonard Riggio, the company’s founder and chairman, said during the presentation. The increase in digital sales will cause a drop in revenue from paper books and prompt the company to close as many as 10 Barnes & Noble stores each of the next three years, he said. Barnes & Noble, which operates 720 bookstores and 637 college locations, said it expects online revenue to be 31 percent of the company’s total sales by 2014, up from 10 percent this year. Digital books have a 20 percent profit margin, compared with 30 percent for paper books sold in stores, the retailer said. “The market is also trying to digest the margin impact,” said Souers, who today changed his annual per-share earnings estimate for the company to a loss of 12 cents from profit of 92 cents. “If they do grow sales and continue to gain share, that will have an impact on earnings down the road.” Excluding some items, the fourth-quarter loss was 89 cents a share, the company said yesterday. Analysts predicted a loss of 81 cents, the average of five estimates compiled by Bloomberg. The net loss widened to $32 million, or 58 cents a share, from $2.69 million, or 5 cents, a year earlier. The retailer’s college bookstores, purchased last year, accounted for 50 cents of the loss, including 15 cents from interest costs, Lombardi said. The February-through-April timeframe is generally a loss in the College Bookstore business.