Market Overview

Can Barnes & Noble (BKS) Survive and Thrive?

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The recent bankruptcy of Borders (NYSE: BGP) has caused many investors to reevaluate their thoughts on companies in the retail books sector. Borders was forced to declare bankruptcy under a large mountain of debt, and now many investors are questioning whether or not similar companies like Barnes & Noble (NYSE: BKS) can stay afloat. Can B&N survive where others have failed?

Barnes & Noble is the largest book retailer in the U.S. and operates over 700 retail bookstores and over 600 college bookstores across the country. The company sells a lot of products outside of retail books as well including e-books, DVD movie formats, toys, and games. They also have one of the most popular e-readers on the market in the Nook (competing with the Amazon Kindle).

In my opinion, Barnes & Noble has a unique opportunity to capitalize on both its online presence and its physical book distribution model. There is something to be said for the experience of visiting a bookstore and indulging in a cup of coffee and a pastry while enjoying a book. That's simply something that a digital distribution model cannot replace. You can also gain immediate access to a physical book, magazine, or other periodical that you may consider buying but are not quite ready to make the purchasing leap. In a sense, bookstores offer free access to a variety of content that ultimately can tempt customers to buy something in a way that digital models cannot.

The company's financial results came in pretty solid last week. Sales were up 7% for the third quarter at $2.3 billion. Same store sales were very impressive, increasing 7.3%. In the quarter, Barnes & Noble saw strong demand for its physical and e-book products. Toy sales were up as well. Earnings were in line with guidance at $170 million and EPS met expectations as well, coming in at $1.00 per share. Barnes & Noble earned its first profit in a year, which may reflect that it's on the uptrend.

For investors who think the brick and mortar model is being wiped out, digital delivery is also a major part of the future of Barnes & Noble. The retailer was late to the game in digital distribution but is quickly making up for lost time. Barnes & Noble now sells twice as many e-books online as physical books. Moreover, the CEO continues to invest heavily in the digital distribution portion of its businesses. In fact, Barnes & Noble suspended its dividend payment to invest more in this business. This was bad news for stock investors over the short term, but is a wise long-term strategic move.

Barnes and Noble needs to continue shifting its strategy more towards publishing digital content. The company recently announced plans to start publishing e-books via its PubIt! arm. With its efforts, the company should be able to compete for authors with Amazon (NASDAQ: AMZN) in the self-publishing arena. Moreover, Barnes & Noble has invested in the NOOK Color and its digital delivery subscription services. The Educational Toys & Games Department is a part of the company's future as well, having had 47% comparable growth in retail stores. Thus, Barnes and Noble has huge growth potential in a wide array of businesses within its bookstore model.

Overall, things are looking up at Barnes & Noble especially given that its main competitor, Borders, is on its last legs. Barnes & Noble has 25% of the e-book market and has its own reader to compete against the Kindle. Its online website continues to generate more revenue for the company, and ultimately, Barnes & Noble does not have to topple Amazon to be successful in the digital publishing industry. The company can generate sizable income and make for a high-quality investment by being the number two player in the industry and an alternative to the 800 pound gorilla that is Amazon.

What are your thoughts on Barnes & Noble?

Mark Riddix writes about investing topics on Money Crashers, one of the top personal finance blogs. Mark is also the founder of his own fnance company, New Horizons Financial Management and writes a weekly column for Benzinga every Wednesday.

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