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The forecasted future cash flows of Barnes & Noble are discounted to a share price of $19 due to 25/50/25 weighting of our pessimistic ($4), base ($21), and optimistic ($31) valuations, respectively. The company may have trouble competing because of its vast amount of competitors like Wal-Mart and online companies, which will affect its long term financial prosperity.i Barnes and Noble is currently a sell with the target price set at $19.
Additionally. Earlier in the year. The deal with Best Buy will greatly increase the Nook's availability and ability to compete directly with the recently launched iPad. Company Profile Barnes & Noble Inc.000 employeesvi.000 and 200. 2010xii.000 book titles as well as 30. company heads rejected his bid to buy 37% of the shares without triggering a shareholder-rights plan.2 million.com is responsible for about 10% of the company's annual salesv. Mr Riggio began with a single college bookstore in 1965.I. Ronald Burkle of Yucaipa Investments continues to press B&N in his bid to gain the largest stake in the companyxiii. Joseph Lombardi owns $2. COO. B&Nis the #1 bookseller in the US and operates 720 Barnes & Noble Superstores throughout all 50 US statesiv. Stephen Riggio. New York and has approximately 37. while online sales surged 32 percentxiv. 2 . was recently named CEO of B&Nxi. Management Widely known as a visionary in the bookselling industry. currently has $24 million in holdings and earns an $800. The company was incorporated in Delaware in 1986iii. who oversaw the development and launch of Nook. He owns about $419 million in stock holdings in the company and has an annual salary of $300.4 million in bonuses. In March 2010.5 million in holdings with a salary of $680.000 and $1. He was previously president of Barnes&Noble. B&N Inc is focusing on the growth of the e-book market to overcome a long-term sales decline at its brick-and-mortar stores.000 with a bonus of $2.000 salary with a $3.4 million bonus on top of that. the CFO. On April 2nd. Recent Developments B&N Inc will sell its Nook electronic-book reader at Best Buy's 1. brother of Leonard and the vice-chairman and CEO.com and was responsible for the company¶s e-commerce operations. is the second largest shareholder with $56 millionx. B&N named William Lynch. The choice of William Lynch to succeed Steve Riggio signals company¶s emphasis on retailer's electronic future. Lynch has put the core e-commerce business on a high growth track and launched the company's digital commerce platform.000 with a bonus of $452. Barnes&Noble. Mr.000ix.5 percent. Burkle called for B&N to add three to four new independent directors. in an attempt to boost B&N¶s online credibility. and now has built the largest retail bookstore company in Americaviii. He also earns a salary of $800. comparable sales at B&N's physical stores fell 5. beginning on April 18.000 music titles. Each superstore stocks between 60.070 stores. (B&N) is a retailer of books and other entertainment through its numerous bookstores and websiteii. B&N is headquartered out of New York. Leonard Riggio is the founder and chairman of B&Nvii. Jr. as chief executive officerxv. During the fourth quarter of 2009. Mitchell Klipper. which is sold at Best Buy in addition to Apple's stores. Finally. William Lynch.
Competition High The retail book industry is highly competitive. B&N is the nation¶s top bookseller brand and is rated second among all retailers in trust. and smaller stores. especially with the younger generation. sales at ³discretionary stores´ such as retail bookstores have decreased overall expectationsxvii. their position as the largest bookseller in the world gives them some bargaining power. Porter Analysis Bargaining Power of Consumers High With consumer spending being down this past year due to the financial crisis. Brand name and brand equity are difficult to establish in this industry for new entrantsxviii. The company¶s biggest competitor in the e-commerce and e-reader industry is Amazon.xx Many customers still rely on B&N for their book buying needs and remain loyal customers. B&N also faces competition from larger mass merchandisers selling books. The company still does face risk from Wal-Mart as well as online competitors such as Apple and Amazon. SWOT Analysis Strengths y According to the EquiTrend Brand Study by Harris Interactive. and B&N may struggle to compete on price against the currently more popular Amazon and Apple e-readers. Threat of Substitute Products High There is a large variety of products in the retail book industry for consumers to choose. not as much capital is needed due to the lack of brick and mortar stores. III. there are many avenues for suppliers to sell their books. and movies. which includes appointing new Executive Vice President. especially in hard copy purchases. who recently released the iPad. Bargaining Power of Supplier Moderate While B&N faces competition from online producers and Wal-Mart. B&N faces several different types of competition varying from large bookstores. Dan Gilbert and Chief Operating Officer. Although with the industry moving more towards e-commerce. III. poses a threat to B&N¶s current as well as future sales. such as Waldenbooks.com. The large number of titles makes it crucial for each retailer to obtain contracts for each title. Still. B&N has established itself as a leader in hard copy book sales which has led to a loyal consumer following. as well as Apple. giving consumers many options to choose from. music. Mitchell Klipperxvi. such as Borders. 3 . The threat of products such as video games and computers. Threat of New Entrants Moderate The capital needed to start a retail book company is large enough to make it difficult for many new entrants into the industry. who has established a trusted name in the e-commerce market as well as with its new Kindle e-readerxix.The company also made other senior management changes.
being a bookselling retailer. To compete. is performing very poorlyxxv.com. built the company up to what it is today. y In late 2009. inherently has low inventory turnover. was recently named CEO of B&N Inc. y Barnes & Noble has been making large strides to become a stronger competitor with college textbooks. is still the chairman of the board. and his brother is the vice-chairman. William Lynch. For these reasons. according to the store¶s website. Although the store sales have been enough recently to keep the store thriving. Borders. management¶s compensation is based mostly off of stock holdings. This can lead to a stronger web brand. Also.xxii Weaknesses y B&N¶s Web-to-Store sales are still very low and have not been growing significantly over the past few years. the founder. This is part of the company¶s overall digital strategy. much of the key management has been promoted from within the company. Jr. the company may see large costs with trends going towards e-readers and away from actual books. the world¶s most advanced eBook Reader.xxvii Klipper may help to improve this part of the company. This can open up opportunities for B&N both with new customers and with new locations if they buy some of the Borders¶ stores. y B&N¶s historical rival. but sees the opportunities available for the company to thrive under new. Amazon. Products like the Kindle have made it possible to read text without having to actually buy y 4 . This new product opens vast new opportunities with the changing trends towards e-readers. it might not be enough in upcoming years with ever-growing trends of online shopping.com. Jr. B&N will have to keep pace with their online sales. and may be correlated with the recent promotion of the William Lynch. which leads to aligned interests. Opportunities y B&N recently launched what they called the ³world¶s largest eBookstore´ in 2009xxiv. This is what can keep B&N going strong. With a stock price below $3xxvi and management looking for buyers. y The company has very strong brand recognition. B&N will have to continue to push the online experience. y The changing trend in recent years has been against reading from the actual books. y Leonard Riggio. who was recently promoted to CEO of Barnes & Noble¶s retail group. This new gadget is the company¶s response to all of the new e-readers that have been coming out in recent years. it would be hard to imagine Borders being a legitimate rival for much longer. With such low turnover. strong management with original and innovative ideas. B&N may not accept a profitable buyout if the opportunity presents itself. has had extensive experience with the company¶s college bookstore operations in the past. the founder and chairman.com and other online retailers pose the largest threat to B&N. This shows some of the versatility of the companyxxi. Threats y Amazon. Magazines are released periodically. after being the president of the Barnes & Noble. y Leonard Riggio.com alone has seen their online sales skyrocket over the past few years.xxiii Additionally.B&N is the second-largest retailer of magazines in America. B&N introduced the nook. y B&N. To compete with companies like Amazon. which brings consistent revenues to the retailer. Mitchell Klipper.
Additionally. with Borders losing over 80% of its market value over the last three yearsxxx. IV. it would be beneficial if Barnes and Noble cut down on its underachieving stores. thus reducing its PPE and operating leases. Barnes and Noble would have a moderate sales growth rate of 3% for the next five years. In the 5-10 years horizon.82%. the company would have a more cash-heavy balance sheet. The projection assumes the creation of B&N College Booksellers will create positive synergies. Inventory would also decrease if the firm better utilized its online sector. the Company would see lower SG&A and COGS. In this scenario. this leads to a very precarious situation for B&N. eventually failing because of it. Finally. Along with other detrimental factors. the company will have major troubles in the future. but this will be partially offset by the same-store sales decline. B&N will finally figure out how to penetrate the online market and compete with online retailers better than in the past.29% in the end of projection. we believe sales growth rate will decline to 2. B&N sees sales deterioration without decreasing leases or PPE. We expect that BKS¶s PPE and operating leases to keep at a consistent level. The bricks-and-mortar bookstore model has struggled of late. which is 7.xxix Due to the online success. If the nook cannot provide a powerful substitute. Pessimistic Scenario (Appendix D) At its worst.04% in our model.xxviii Some analysts even believe this will substantially outperform Amazon¶s Kindle. We also expect the nook. BKS¶s proprietary e-reader. Valuation (for general information see Appendix A) Base Case Scenario (Appendix B) Under the average case scenario. B&N would see constant sales growth of 5%. BKS is not able to make much more than WACC.5% and finally stabilizes at 2% in perpetuity. like many other online operators. if the iPad and the Kindle become the two dominant players in the e-reader business. We believe due to the increasing competition from Amazon and Apple. Conclusion 5 .¶s new tablet computer. IV. ROIC will gradually grows to 7. This reflects that the mature US book-retailing industry could not keep up with the nominal GDP growth in the long run.the books. Barnes & Noble may be left without any area to experience revenue growth. to give a small boost to total sales in the short run. up from the current level of 6. With its better online production. Barnes & Noble has what could potentially become a dying business model. All of this could lead to Barnes & Noble becoming the Blockbuster of the movie rental business: a once profitable company that did not adapt to changing technology fast enough. the Nook could end up being an unprofitable operating segment. The main contributor to this increase in the growth rate would be online sales. assuming BKS will strategically focus on the online sales and Nook in the future. B&N should see positive synergies providing a bookstore for Apple Inc. With online sales struggling to experience growthxxxi. In addition. Best Case Scenario (Appendix C) Under this scenario. This increase in ROIC is primarily driven by a wider margin of the online-sales.
tradingmarkets.html vi BKS Form 10-k 2009 vii http://topics.com/article/BT-CO-20100126-709788.mergentonline.wsj.hoovers.asp?company=78060&Page=executives xxiii http://www. and we recommend a sell.asp xiii WSJ Online xiv BKS Form 10-q 2009 xv http://www.referenceforbusiness.html ix BKS Form 10-k 2009 x BKS Form 10-k 2009 xi WSJ Online xii http://www.com/2010/01/25/apple-tablet-barnes-noble-bookstore/ xxx http://www.barnesandnobleinc.com.com/news/stock-alert/bks_barnes-amp-noble-names-william-lynch-ceo-882053.barnesandnobleinc.com/company/Barnes__Noble_Inc/rjhryi-1.barnesandnobleinc.cfm?story_id=15825802 xxxi BKS Form 10-k 2009 ii 6 . we see the downside potential.library.com/our_company/management_team/mitchell_klipper/mitchell_klipper.nd.html xxiv http://gizmodo. to be too great to warrant a buy or hold. After years of dominating the bookselling industry. Base Case $21 Worst Case $4 Best Case $31 Target Price $19 Current Price Recommendation i $21. changing technology and demographics threaten the company¶s ability to maintain a sustainable competitive advantage.yahoo.74 Sell Barnes and Noble 10 Q Report BKS Form 10-k 2009 iii BKS Form 10-k 2009 iv http://www.com/our_company/management_team/management_team.com/our_company/our_company. as depicted in the pessimistic scenario model.com/q?s=BGP xxvii http://www. The e-reader could end up changing the book industry the way that the iPod changed music and Netflix changed movie rentals.hoovers.2362509.html xvii S&P Net Advantage xviii IBISWorld Industry Report Book Stores xix BKS Form 10-k 2009 xx http://www.B&N is at a turning point in its lifecycle.economist.html v http://www.tradingmarkets.com/company/Barnes__Noble_Inc/rjhryi-1.html xxix http://techcrunch.edu/compdetail.wsj. the Company may fall victim to the Kindle and iPad because they did not move into the market fast enough.com/news/stock-alert/bks_barnes-amp-noble-names-william-lynch-ceo-882053.proxy.com/article2/0. While B&N has developed the nook.html xxi Same as above xxii http://www.com/biography/M-R/Riggio-Stephen-1954.html xxviii http://online.html xvi http://www. The target share price for B&N is $19.com/5318896/barnes-and-noble-announces-worlds-largest-ebookstore-upcoming-ereader xxv Borders Form 10-k 2009 xxvi http://finance.com/business-finance/displaystory.com/person/r/leonard-riggio/827 viii http://www.pcmag. While the upside we see in the best case scenario is fathomable.2817.00.
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