barnes and noble exec sum etc

8/8/2019 Barnes and Noble Exec Sum Etc

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Barnes & Noble is currently overvalued based on a current share price of $21.74. The forecastedfuture cash flows of Barnes & Noble are discounted to a share price of $19 due to 25/50/25weighting of our pessimistic ($4), base ($21), and optimistic ($31) valuations, respectively. Thecompany 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.

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Barnes and Noble iscurrently a sell with the target price set at $19.

Executive Summary



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Barnes & Noble Inc. (B&N) is a retailer of books and other entertainment through its numerous bookstores and websiteii. The company was incorporated in Delaware in 1986iii. B&Nis the #1 bookseller in the US and operates 720 Barnes & Noble Superstores throughout all 50 US statesiv.

Each superstore stocks between 60,000 and 200,000 book titles as well as 30,000 music titles.Barnes&Noble.com is responsible for about 10% of the company's annual salesv.

B&N is headquartered out of New York, New York and has approximately 37,000 employeesvi.

ManagementWidely known as a visionary in the bookselling industry, Leonard Riggio is the founder andchairman of B&N

vii. Mr Riggio began with a single college bookstore in 1965, and now has

built the largest retail bookstore company in Americaviii. He owns about $419 million in stock holdings in the company and has an annual salary of $300,000 with a bonus of $452,000 ix.

Stephen Riggio, brother of Leonard and the vice-chairman and CEO, is the second largestshareholder with $56 millionx. He also earns a salary of $800,000 with a bonus of $2.2 million.Mitchell Klipper, COO, currently has $24 million in holdings and earns an $800,000 salary witha $3.4 million bonus on top of that. Additionally, the CFO, Joseph Lombardi owns $2.5 millionin holdings with a salary of $680,000 and $1.4 million in bonuses. Finally, in an attempt to boostB&N¶s online credibility, William Lynch, Jr. was recently named CEO of B&Nxi. He was previously president of Barnes&Noble.com and was responsible for the company¶s e-commerceoperations.

Recent Developments

B&N Inc will sell its Nook electronic-book reader at Best Buy's 1,070 stores, beginning on April18, 2010xii. The deal with Best Buy will greatly increase the Nook's availability and ability tocompete directly with the recently launched iPad, which is sold at Best Buy in addition toApple's stores.

Ronald Burkle of Yucaipa Investments continues to press B&N in his bid to gain the largeststake in the companyxiii. On April 2nd, Burkle called for B&N to add three to four newindependent directors. Earlier in the year, company heads rejected his bid to buy 37% of theshares without triggering a shareholder-rights plan.

B&N Inc is focusing on the growth of the e-book market to overcome a long-term sales declineat its brick-and-mortar stores. During the fourth quarter of 2009, comparable sales at B&N's physical stores fell 5.5 percent, while online sales surged 32 percentxiv.

In March 2010, B&N named William Lynch, who oversaw the development and launch of Nook,as chief executive officer xv. The choice of William Lynch to succeed Steve Riggio signalscompany¶s emphasis on retailer's electronic future. Mr. Lynch has put the core e-commerce business on a high growth track and launched the company's digital commerce platform.

I. Company Profile



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The company also made other senior management changes, which includes appointing newExecutive Vice President, Dan Gilbert and Chief Operating Officer, Mitchell Klipper xvi.

Bargaining Power of Consumers

HighWith consumer spending being down this past year due to the financial crisis, sales at³discretionary stores´ such as retail bookstores have decreased overall expectationsxvii. B&N hasestablished itself as a leader in hard copy book sales which has led to a loyal consumer following. The company still does face risk from Wal-Mart as well as online competitors suchas Apple and Amazon, giving consumers many options to choose from.

Bargaining Power of Supplier ModerateWhile B&N faces competition from online producers and Wal-Mart, their position as the largest bookseller in the world gives them some bargaining power, especially in hard copy purchases.Still, there are many avenues for suppliers to sell their books, and B&N may struggle to compete

on price against the currently more popular Amazon and Apple e-readers.

Threat of Substitute Products HighThere is a large variety of products in the retail book industry for consumers to choose. Thelarge number of titles makes it crucial for each retailer to obtain contracts for each title. Thethreat of products such as video games and computers, especially with the younger generation, poses a threat to B&N¶s current as well as future sales.

Threat of New Entrants ModerateThe capital needed to start a retail book company is large enough to make it difficult for manynew entrants into the industry. Although with the industry moving more towards e-commerce,not as much capital is needed due to the lack of brick and mortar stores. Brand name and brandequity are difficult to establish in this industry for new entrantsxviii.

Competition HighThe retail book industry is highly competitive. B&N faces several different types of competition varying from large bookstores, such as Borders, and smaller stores, such asWaldenbooks. B&N also faces competition from larger mass merchandisers selling books,music, and movies. The company¶s biggest competitor in the e-commerce and e-reader industryis Amazon.com, who has established a trusted name in the e-commerce market as well as with itsnew Kindle e-reader xix, as well as Apple, who recently released the iPad.

Strengths

y According to the EquiTrend Brand Study by Harris Interactive, B&N is the nation¶s top

bookseller brand and is rated second among all retailers in trust.xx Many customers

still rely on B&N for their book buying needs and remain loyal customers.

III. SWOT Analysis

III. Porter Analysis



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y B&N is the second-largest retailer of magazines in America. This shows some of theversatility of the companyxxi. Magazines are released periodically, which bringsconsistent revenues to the retailer.

y The company has very strong brand recognition. This is what can keep B&N goingstrong.

y Leonard Riggio, the founder and chairman, built the company up to what it is today, butsees the opportunities available for the company to thrive under new, strong

management with original and innovative ideas. William Lynch, Jr. was recently namedCEO of B&N Inc. after being the president of the Barnes & Noble.com. This can lead toa stronger web brand. Also, management¶s compensation is based mostly off of stock holdings, which leads to aligned interests.xxii

Weaknesses

y B&N¶s Web-to-Store sales are still very low and have not been growing significantlyover the past few years. Although the store sales have been enough recently to keep thestore thriving, it might not be enough in upcoming years with ever-growing trends of online shopping.

y Leonard Riggio, the founder, is still the chairman of the board, and his brother is thevice-chairman.xxiii Additionally, much of the key management has been promoted fromwithin the company. For these reasons, B&N may not accept a profitable buyout if the opportunity presents itself.

y B&N, being a bookselling retailer, inherently has low inventory turnover. With suchlow turnover, the company may see large costs with trends going towards e-readers andaway from actual books.

Opportunities

y B&N recently launched what they called the ³world¶s largest eBookstore´ in 2009xxiv.This is part of the company¶s overall digital strategy, and may be correlated with therecent promotion of the William Lynch, Jr. To compete with companies like

Amazon.com, B&N will have to continue to push the online experience.y B&N¶s historical rival, Borders, is performing very poorly

xxv. With a stock price

below $3xxvi and management looking for buyers, it would be hard to imagine Borders being a legitimate rival for much longer. This can open up opportunities for B&N bothwith new customers and with new locations if they buy some of the Borders¶ stores.

y Barnes & Noble has been making large strides to become a stronger competitor withcollege textbooks. Mitchell Klipper, who was recently promoted to CEO of Barnes & Noble¶s retail group, has had extensive experience with the company¶s college bookstoreoperations in the past.xxvii Klipper may help to improve this part of the company.

y In late 2009, B&N introduced the nook, the world¶s most advanced eBook Reader,according to the store¶s website. This new gadget is the company¶s response to all of

the new e-readers that have been coming out in recent years. This new product opensvast new opportunities with the changing trends towards e-readers.

Threats

y Amazon.com and other online retailers pose the largest threat to B&N. Amazon.comalone has seen their online sales skyrocket over the past few years. To compete, B&Nwill have to keep pace with their online sales.

y The changing trend in recent years has been against reading from the actual books.Products like the Kindle have made it possible to read text without having to actually buy



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the books. If the nook cannot provide a powerful substitute, the company will have major troubles in the future.

Base Case Scenario (Appendix B) Under the average case scenario, Barnes and Noble would have a moderate sales growth rate of 3% for the next five years. The projection assumes the creation of B&N College Booksellers willcreate positive synergies, but this will be partially offset by the same-store sales decline. We alsoexpect the nook , BKS¶s proprietary e-reader, to give a small boost to total sales in the short run.In the 5-10 years horizon, we believe sales growth rate will decline to 2.5% and finally stabilizesat 2% in perpetuity. This reflects that the mature US book-retailing industry could not keep upwith the nominal GDP growth in the long run.

We expect that BKS¶s PPE and operating leases to keep at a consistent level, assuming BKS willstrategically focus on the online sales and Nook in the future. ROIC will gradually grows to

7.29% in the end of projection, up from the current level of 6.82%. This increase in ROIC is primarily driven by a wider margin of the online-sales. We believe due to the increasingcompetition from Amazon and Apple, BKS is not able to make much more than WACC, whichis 7.04% in our model.Best Case Scenario (Appendix C) Under this scenario, B&N would see constant sales growth of 5%. The main contributor to thisincrease in the growth rate would be online sales. B&N will finally figure out how to penetratethe online market and compete with online retailers better than in the past. In addition, B&Nshould see positive synergies providing a bookstore for Apple Inc.¶s new tablet computer.xxviii Some analysts even believe this will substantially outperform Amazon¶s Kindle.xxix Due to theonline success, the Company would see lower SG&A and COGS. Inventory would also decreaseif the firm better utilized its online sector. Finally, it would be beneficial if Barnes and Noble cutdown on its underachieving stores, thus reducing its PPE and operating leases. With its better online production, the company would have a more cash-heavy balance sheet, like many other online operators.

Pessimistic Scenario (Appendix D) At its worst, Barnes & Noble has what could potentially become a dying business model. The bricks-and-mortar bookstore model has struggled of late, with Borders losing over 80% of itsmarket value over the last three yearsxxx. With online sales struggling to experience growthxxxi,Barnes & Noble may be left without any area to experience revenue growth. Additionally, if theiPad and the Kindle become the two dominant players in the e-reader business, the Nook couldend up being an unprofitable operating segment. All of this could lead to Barnes & Noble becoming the Blockbuster of the movie rental business: a once profitable company that did notadapt to changing technology fast enough, eventually failing because of it. In this scenario, B&Nsees sales deterioration without decreasing leases or PPE. Along with other detrimental factors,this leads to a very precarious situation for B&N.

IV. Valuation (for general information see Appendix A)

IV. Conclusion



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B&N is at a turning point in its lifecycle. After years of dominating the bookselling industry,changing technology and demographics threaten the company¶s ability to maintain a sustainablecompetitive advantage. The e-reader could end up changing the book industry the way that theiPod changed music and Netflix changed movie rentals. While B&N has developed the nook , theCompany may fall victim to the Kindle and iPad because they did not move into the market fast

enough. While the upside we see in the best case scenario is fathomable, we see the downside potential, as depicted in the pessimistic scenario model, to be too great to warrant a buy or hold.The target share price for B&N is $19, and we recommend a sell.

Base Case $21

Worst Case $4

Best Case $31

Target Price $19

Current Price $21.74Recommendation Sell

i Barnes and Noble 10 Q Reportii BKS Form 10-k 2009iii BKS Form 10-k 2009iv http://www.hoovers.com/company/Barnes__Noble_Inc/rjhryi-1.htmlv http://www.hoovers.com/company/Barnes__Noble_Inc/rjhryi-1.htmlvi BKS Form 10-k 2009vii http://topics.wsj.com/person/r/leonard-riggio/827viii http://www.referenceforbusiness.com/biography/M-R/Riggio-Stephen-1954.htmlix BKS Form 10-k 2009x BKS Form 10-k 2009xi WSJ Onlinexii http://www.pcmag.com/article2/0,2817,2362509,00.aspxiii WSJ Onlinexiv BKS Form 10-q 2009xv http://www.tradingmarkets.com/news/stock-alert/bks_barnes-amp-noble-names-william-lynch-ceo-882053.htmlxvi http://www.tradingmarkets.com/news/stock-alert/bks_barnes-amp-noble-names-william-lynch-ceo-882053.htmlxvii S&P Net Advantagexviii IBISWorld Industry Report Book Storesxix BKS Form 10-k 2009xx http://www.barnesandnobleinc.com/our_company/our_company.htmlxxi Same as abovexxii http://www.mergentonline.com.proxy.library.nd.edu/compdetail.asp?company=78060&Page=executivesxxiii http://www.barnesandnobleinc.com/our_company/management_team/management_team.htmlxxiv http://gizmodo.com/5318896/barnes-and-noble-announces-worlds-largest-ebookstore-upcoming-ereader xxv Borders Form 10-k 2009xxvi http://finance.yahoo.com/q?s=BGPxxvii http://www.barnesandnobleinc.com/our_company/management_team/mitchell_klipper/mitchell_klipper.htmlxxviii http://online.wsj.com/article/BT-CO-20100126-709788.htmlxxix http://techcrunch.com/2010/01/25/apple-tablet-barnes-noble-bookstore/xxx http://www.economist.com/business-finance/displaystory.cfm?story_id=15825802xxxi BKS Form 10-k 2009

barnes and noble exec sum etc

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