Books-A-Million, Inc.

(BAMM)
by: David Krauza
12-November-2010

Books-a-MIllion stock price as of this writing is $6.64

Business Description
Books-A-Million, Inc. is a book retailer in the south-eastern United States. The Company operates both
superstores and traditional bookstores. Superstores, range in size from 8,000 to 36,000 square feet and
operate under the names Books-A-Million and Books and Co. Traditional bookstores are smaller stores
operated under the names Bookland and Books-A-Million. These stores range in size from 2,000 to 7,000
square feet and are located in enclosed malls. All store formats generally offer an extensive selection of
best sellers and other hardcover and paperback books, magazines, and newspapers. In addition to the
retail store formats, the Company offer the products over the Internet at Booksamillion.com. The
Company operates in two business segments: retail trade and electronic commerce trade. 1

Investment Thesis
BAMM earns an attractive return on invested capital (17.48%). The firm has consistently paid a dividend
since at least 2008, in-fact the most attractive feature of the firm is its 3% dividend yield. The book value
of BAMMʼs inventory is $201.51 million (using the LIFO method). With 15.54 million shares outstanding,
the per share value of inventory is $12.96, this is significantly more than the $6.64 stock price. The firm
also reports $6.6 million in cash, which works out to $0.43 per share in cash.

Management
The directors and executive officers of the firm collectively as a group own 55.6% of the outstanding
shares of the firm, with 52.2% of the shares controlled by an investment company that is managed by the
heirs of the founding family; of which the CEO and Chairman of the Board is a member. Outside of the
founding family only one other member of the directors and executive officers owns more than 1% of the
outstanding shares, all other own insignificant amounts.

There have been no significant insider stock transactions in the past three months. In the past 12 months
there have been 10 insider transactions, 9 of which have been buys and one sell transaction.

BAMM has entered into an agreement to purchase a 40% equity stake in Yogurt Mountain Holdings, LLC
for $3 million in cash. BAMM has replaced the coffee outlet in several stores with a Yogurt Mountain
outlet. Since coffee outlet are typically prevalent in book stores the replacement of a coffee outlet with a
frozen yogurt outlet indicates management is not afraid to try new things to drive an increase in foot traffic
to retail outlets.

BAMM purchases a significant amount of its inventory from an entity that is controlled the family of the
CEO and Chairman of the Board. However, no one vendor accounts for more than 10% of BAMMʼs
inventory purchases.

BAMM divides its board of directors into three classes of directors serving stagger terms. This board
structure has the potential to diminish the power shareholders have to control who will serve on the
board. It is possible that such a board structure will create a board whose interests are more inline with
management rather than the shareholders.

Weaknesses and Risks

BAMM has a low level of debt, it has operating cash flow that would seem to support its operating
earnings, and an attractive return on invested capital so it would seem that BAMM is not exposed to a
great deal of financial risk, the firm does have significant business risks.

1 http://www.google.com/finance?q=bamm

Page 1 of 4
Disclosure: This is NOT a buy or sell recommendation. Informational purposes only.
Books-A-Million, Inc. (BAMM)
by: David Krauza
12-November-2010

The first and most significant risk to BAMM is consumer demand shifting from traditional hardcover and
paperback books to ebooks. Because BAMM does not have a closed ebook ecosystem (i.e. Amazon
Kindle) where it controls the hardware and content BAMM potentially faces reduced margins from ebooks
that it may sell. BAMM may not have the business expertise for ebook sales which could also impact
operating results. Increased ebook sales also threatens foot traffic to BAMMʼs traditional brick-and-mortar
stores, with reduced traffic sales will be negatively impacted.

A second threat that BAMM faces is sales of traditional hardback and paperback books via the internet.
BAMM does have an internet presence with bookamillion.com. It is, however, doubtful that BAMM has
significant mind share and marketshare for online purchases outside of BAMMʼs traditional operating
footprint of the Southeastern United States.

A third weakness/threat to BAMM is that it is a smaller firm than many of its chief competitors, such as
Barnes & Noble and Borders, so it may not possess the economies of scale nor engage in exclusive
arrangements that its competitors might. Also, BAMM is facing new competition from non-traditional book
selling firms such as Wal-Mart and Cosco. These new competitors are able to sell best selling titles at
steep discounts.

Valuations
In Millions of USD (except for per share items and percentages)
2010 2009 2008 2007
Year Ending 30-Jan-2010
Revenue 508.67 515.36 536.05 520.42
Gross Profit 152.23 153.42 159.39 156.73
Gross Margin 29.93% 29.77% 29.73% 30.12%
Expenses 282.78 287.95 291.36 283.36
Expense Margin 55.59% 55.87% 54.35% 54.45%
EBIT 21.68 18.89 27.42 30.10
EBIT Margin 4.26% 3.67% 5.12% 5.78%

Pre-Tax FCF
CapEx 10.72 19.82 16.88 16.19
NWC 74.90 62.15 58.79 117.73
Change in NWC 12.75 3.36 -58.94 N/A
FCF 5.14 6.94 45.45 5.02
FCF Margin 1.01% 1.35% 8.48% 0.96%

Balance Sheet
Excess Cash 6.60 5.53 5.59 34.12
Total Debt 6.36 22.48 34.94 7.10
Net Cash 0.24 -16.95 -29.35 27.02
Invested Capital 124.04 131.39 137.29 137.35
ROIC 17.48% 14.38% 19.97% 21.91%

Enterprise Value 103,179.76

Earnings Yield 13.61%
Dividend Yield 3.01%
Current Ratio 1.53

Page 2 of 4
Disclosure: This is NOT a buy or sell recommendation. Informational purposes only.
Books-A-Million, Inc. (BAMM)
by: David Krauza
12-November-2010

Discounted Free Cash Flow (FCF) Analysis

In Millions of USD (except for per share items and percentages)

For purposes of this FCF analysis the initial FCF used was the average of 2010, 2009, and 2007. 2008
FCF was not used to compute the average FCF due to net new borrowing in that year that would skew
the results. A discount rate of 9% is applied to all discount calculations.

The first Discounted Free Cash Flow analysis is a pessimistic model it assumes that FCF for BAMM will
grow at 1.5% for 10 years. After that the FCF will grow in perpetuity at 3.3%, which is long run growth
economic growth rate for the US economy over the last 65 years. This analysis shows that BAMM is
currently trading a premium to its estimated value, there is no margin of safety.

Year FCF DFCF

2011 5.79 5.31
2012 5.87 4.94
2013 5.96 4.60
2014 6.05 4.29
2015 6.14 3.99
2016 6.23 3.72
2017 6.33 3.46
2018 6.42 3.22
2019 6.52 3.00
2020 6.62 2.79
Perpetuity 119.88 50.64
Sum of Present Values 89.96
Per Share Estimate Value 5.79
Margin of Safety -12.81%

The second Discounted Free Cash Flow analysis is a model assumes that FCF for BAMM will grow at the
long term average growth rate of the US economy of 3.3%. This analysis shows that BAMM is currently
trading a premium to its estimated value, there is no margin of safety.

Year FCF DFCF

2011 5.79 5.31
2012 5.98 5.03
2013 6.17 4.77
2014 6.38 4.52
2015 6.59 4.28
2016 6.81 4.06
2017 7.03 3.85
2018 7.26 3.64
2019 7.50 3.45
2020 7.75 3.27
Perpetuity 140.43 59.32
Sum of Present Values 101.50
Per Share Estimate Value 6.53
Margin of Safety -1.63%

Page 3 of 4
Disclosure: This is NOT a buy or sell recommendation. Informational purposes only.
Books-A-Million, Inc. (BAMM)
by: David Krauza
12-November-2010

The last Discounted Free Cash Flow analysis is an optimistic model it assumes that FCF for BAMM will
grow at 10.0% for 10 years. After that the FCF will grow in perpetuity at 3.3%, which is long run growth
economic growth rate for the US economy over the last 65 years. This analysis shows that BAMM is
currently trading a discount to its estimated value with a margin of safety of 39%.

Year FCF DFCF

2011 5.79 5.31
2012 6.36 5.36
2013 7.00 5.41
2014 7.70 5.46
2015 8.47 5.51
2016 9.32 5.56
2017 10.25 5.61
2018 11.27 5.66
2019 12.40 5.71
2020 13.64 5.76
Perpetuity 247.23 104.43
Sum of Present Values 159.76
Per Share Estimate Value 10.28
Margin of Safety 54.82%

The Discounted Free Cash Flow models indicate that BAMM can be bought at an acceptable margin of
safety if the investor believes BAMMʼs Free Cash Flow grows over the next decade at a rate faster than
the US Economy has averaged over the past 65 years.

Page 4 of 4
Disclosure: This is NOT a buy or sell recommendation. Informational purposes only.