Dodecahedron Books

Saturday, 15 June 2019

Requiem for a Heavyweight – Barnes and Noble Booksellers Sold to a Hedge Fund

On June 8 of this year (2019) The Globe and Mail reported that a U.S. Hedge Fund is to buy the American bookseller Barnes and Noble, the largest bookstore chain in America. That means that it will cease being a publicly traded stock, and will be owned by a private capital concern, Elliot Management Corporation. That may be a lifeline for the troubled book giant, or it may be a signal that the company will be out of business soon, at least as far as selling books is concerned.

The graph above shows sales over the 20 year period from 1999-2018. The figures come from the annual reports, available on their website. I should note that stitching together a time series like this has its issues – there are frequent restatements of numbers, and an entity such as a big corporation tends to morph a bit over 20 years, buying and selling new assets to add to and subtract from the business. But, I think the overall story is still pretty clear, even if it is possible to quibble with the details.

As you can see, there was steady growth through the 1999-2007 period, then a significant fall-off between 2008 and 2010, no doubt due to the recession of that time. Strong growth then resumed until 2011-12, when it began to fall back, likely due to the competition of Amazon and e-books in general (though B&N did try to keep up, with the Nook e-book reader).

In 2015 the company spun off B&N Education, which had valuable campus bookstores. That provided cash, but amounted to giving up a reliable resource, as campus bookstores have a moat around them, as they say in the investing world (i.e. they are natural monopolies). Since then, sales continued to decline, up until the present day. In inflation-adjusted terms, B&N are now selling fewer books than they were in 1999.

The next graph shows their net income (Sales minus Expenses) over that time period (note that this doesn’t account for taxes and other costs that eat into profits). The company was making good money in the early 2000’s but was hit by the multiple evils of a recession, changing technology for reading, and a monster of a competitor, in Amazon.

There have been at least two money losing years since 2010, and most of the other years since that time have had little return on investment. The fact that 2018 was a bad year has to be especially troubling for Barnes and Noble, as the economy was doing very well in the U.S., in terms of employment, which is important for book sales, as they are something of a discretionary good. As it happens, the same thing happened during the past year at Chapters, in Canada. Whether this is a signal about the wider North American economy, or something to do with competition within the industry (e.g. Amazon), we can’t really know, yet.

For what it’s worth, 2018 was also a bit of a lower year in sales for our little Indie publishing concern, Dodecahedron Books (though you have the opportunity to be a business turnaround artist, via buying a book from us, in one of the links below).😀

These issues become more evident in the next graph, which shows net income as a percentage of sales, a rough and ready proxy for return on investment.

The company has rarely gone above 2% by this measure, since 2010. In fact, over that time span the simple average on this R.O.I. measure has been only about 0.4%, barely breaking even. While the 2015 sale of B&N Education may have generated cash to help keep the mother company going, for a company to remain in business over the long haul, it has to do better than this. Some investors may hang on for the ride down, hoping to make some money with clever timing, but eventually even they will throw in the towel.

And, it seems like that is what has happened. The hedge fund is taking over and says it is bringing in new talent from the U.K.(i.e. a "turnaround artist"), to effect a turnaround , but the chances of that working don’t seem very good to me. Amazon isn’t going away anytime soon, and neither are e-readers. The trend looks inevitable and hedge funds aren’t generally noted for having long time-lines.

Here’s a bit from Investopedia, regarding hedge funds:

“Hedge funds are alternative investments that use pooled funds and employ a variety of strategies to earn returns for their investors. The aim of a hedge fund is to provide the highest investment returns possible as quickly as possible. To achieve this goal, hedge fund investments are primarily in highly liquid assets, enabling the fund to take profits quickly on one investment and then shift funds into another investment that is more immediately promising. Hedge funds tend to use leverage, or borrowed money, to increase their returns. But such strategies are risky—highly leveraged firms were hit hard during the 2008 financial crisis.”

Should Barnes and Noble go out of business, that would have tremendous reverberations throughout the book world. They are the main U.S. vector for getting print books in the hands of readers, so their absence would leave a gaping hole in the distribution side of the print book world. And since print books and their distribution are the main value proposition the big publishers can offer to popular writers, that would also upset the creative side of the business. So, both the demand and supply aspects of the publishing industry would be transformed, and not in a good way for the status quo.

Of course small publishers and self-publishers assume that they would benefit from the disruption, and that is probably true to some extent. But, it might just unleash a lot of popular writers from their publishers which could provide some highly motivated competition for indies. You just never know, when it comes to disruption, how things will shake out.

Here are a few earlier blogs on related subjects (the one about "value traps" is rather relevant):

Are Barnes and Noble, Chapters Indigo and the Big Five Publishers “Value Traps”?

https://dodecahedronbooks.blogspot.com/2015/07/are-barnes-and-noble-chapters-indigo.html

Some Recent News from Barnes and Noble, Chapters Indigo and Penguin Random House Canada

https://dodecahedronbooks.blogspot.com/2015/07/some-recent-news-from-barnes-and-noble.html

Whither Chapters 3 (and whither Barnes and Noble)

https://dodecahedronbooks.blogspot.com/2014/10/whither-chapters-3-and-whither-barnes.html

Whither Chapters 2 (and Whither Barnes and Noble too)

https://dodecahedronbooks.blogspot.com/2014/03/whither-chapters-2-and-whither-barnes.html

Whither Chapters (or Wither Chapters?)

https://dodecahedronbooks.blogspot.com/2013/11/whither-chapters-or-wither-chapters.html

And here’s XKCD on the limited power of a 2% return on investment:

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Now that you have read about publishing investments going under water, you should relax and take a mental road trip to the seaside, to really appreciate how deep water can go, but in a good way. Newfoundland would be a great place for that.

A Drive Across Newfoundland

U.S.: https://www.amazon.com/dp/B07NMR9WM8

U.K.: https://www.amazon.co.uk/dp/B07NMR9WM8

Germany: https://www.amazon.de/dp/B07NMR9WM8

Japan: https://www.amazon.co.jp/dp/B07NMR9WM8

Canada: https://www.amazon.ca/dp/B07NMR9WM8

Australia: https://www.amazon.com.au/dp/B07NMR9WM8

India: https://www.amazon.in/dp/B07NMR9WM8

Newfoundland, Canada’s most easterly province, is a region that is both fascinating in its unique culture and amazing in its vistas of stark beauty. The weather is often wild, with coastal regions known for steep cliffs and crashing waves (though tranquil beaches exist too). The inland areas are primarily Precambrian shield, dominated by forests, rivers, rock formations, and abundant wildlife. The province also features some of the Earth’s most remarkable geology, notably The Tablelands, where the mantle rocks of the Earth’s interior have been exposed at the surface, permitting one to explore an almost alien landscape, an opportunity available on only a few scattered regions of the planet.

The city of St. John’s is one of Canada’s most unique urban areas, with a population that maintains many old traditions and cultural aspects of the British Isles. That’s true of the rest of the province, as well, where the people are friendly and inclined to chat amiably with visitors. Plus, they talk with amusing accents and party hard, so what’s not to like?

This account focusses on a two-week road trip in October 2007, from St. John’s in the southeast, to L’Anse aux Meadows in the far northwest, the only known Viking settlement in North America. It also features a day hike visit to The Tablelands, a remarkable and majestic geological feature. Even those who don’t normally consider themselves very interested in geology will find themselves awe-struck by these other-worldly landscapes.

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Alternatively, rather than worrying about the eclipse of Barnes and Noble in the U.S., why not take a trip to see a total solar eclipse in the U.S.? Now, that’s an eclipse we can all enjoy.

The Great American Solar Eclipse of 2017

U.S.: https://www.amazon.com/dp/B07BH7WBQ1

U.K.: https://www.amazon.co.uk/dp/B07BH7WBQ1

Germany: https://www.amazon.de/dp/B07BH7WBQ1

Japan: https://www.amazon.co.jp/dp/B07BH7WBQ1

Canada: https://www.amazon.ca/dp/B07BH7WBQ1

Australia: https://www.amazon.com.au/dp/B07BH7WBQ1

India: https://www.amazon.in/dp/B07BH7WBQ1

Total solar eclipses are spectacular events, so much so that some people get hooked on them. They become eclipse addicts, who pursue these celestial events around the planet, from country to country as the predicted eclipses come and go. Of course, for most people, eclipse viewing is conditioned by the constraints of available vacation time and spare money. So, an eclipse through the heart of United States, during the height of the 2017 summer, brought the experience home for a lot more people than is usually the case.

This is an account of one such set of eclipse observers, journeying from Calgary, Canada to Idaho Falls, USA to take in the 2017 solar eclipse on a beautiful cloudless August day. It includes a description of the trip itself, through the coulees and mountain ranges of Alberta, Montana and Idaho, culminating in an unforgettable eclipse day in Idaho Falls. It also contains a reasonable amount of scientific and literary background on the eclipse phenomenon, and how it has been experienced by people through the years.

The story is about 12000 words, about 60 to 90 minutes at typical reading speeds.

Sunday, 2 June 2019

Forest Fire Smoke and Solar Panels

It seems as if forest fires are becoming bigger and more destructive in recent years. This is certainly consistent with the theory of global warming caused by carbon dioxide and other greenhouse gases. Some people disagree with that theory, but be that as it may, there is no doubt that the increasing smoke days affect human health and activity.

One other thing that forest fire smoke affects is solar power, as it stops light from reaching solar panels. Depending on the size of the particles, the light can be scattered or absorbed, via the processes of reflection, refraction or diffraction. Photons tend to be scattered by the smaller and intermediate sized smoke particles, which can give the atmosphere a hazy appearance. They can also be absorbed by larger particles, which gives a darkening effect to the sky. Smaller particles can scatter wavelengths of light differentially, which can give the sun a strange red appearance, much like a sunset, though even redder at times. (Fundamentals of Air Pollution, Williamson).

The picture below gives some idea of this, though the redness of the sun was not well picked up by the iPhone camera that I used.

In my city (Edmonton, Alberta, Canada), we have seen a lot of serious forest fires in the past few years, which have blown tremendous amounts of smoke over long distances. In fact, it is not unusual to be severely “smoked in” by fires in neighboring British Columbia, though the most recent troublesome fires have been in the far north of Alberta, in High Level (roughly 700 kilometers away) and Lesser Slave Lake (roughly 350 kilometers away).

That’s a long way to travel, but according to an old text book that I own (Fundamentals of Air Pollution, Williamson), “Some estimates conclude that the mean time for which a particle is a resident in the lower troposphere is about five days”(page 345). That’s over 100 hours, so if a wind is blowing constantly at 10 km/hour, the particulate matter can travel 1000 km or so. There would naturally be some dispersal, so the smoke will be relatively diluted compared to the source, but the amount of smoke in the air can still be surprising.

Attached is a graph of my solar panel array’s output during the last week or so of May, 2019. As you can see, the heavy smoke of May 30 dropped the power output to about only 23% of its pre-smoke levels from about 26 KWhrs to about 6 KWHrs. The day after, the smoke had cleared quite substantially, so the power was cut to about 65% of its pre-smoke levels. Then, by the third day, most of the smoke was gone, and the solar panel output had recovered to about 85%.

I should note that on the worst day, the sun was bright red at mid-day, an otherwise clear day. Visibility was poor – I could just barely see a building about 2 blocks from my office window, which is usually easy to make out, as it is a bright yellow (the University of Alberta Butterdome, a sports facility nicknamed for its shape and colour, which make it resemble a block of butter).

Here’s a photo of the sun that day, that I took with my iPhone. Unfortunately, the iPhone camera pixels get saturated pretty quickly, so the red is washed out to yellow in the center of the sun. The edge effects (sort of pink at the edge of the sun) are more like what the visual appearance was to the human eye over the entire globe of the sun (though even somewhat redder than that). These edge effects are somewhat reminiscent of solar limb darkening, though, as I stated above, I believe they are mostly a camera artifact, perhaps enhanced by refraction of the sun’s light through some of the smaller aerosols in the smoky sky.

Also attached is a graph from the previous August, which was a very smoky month, due to fires in British Columbia that years. As you can see, there were two separate multi-day smoke events, one about a third of the way through the month, and another about two-thirds of the way through. In that case, the first smoke event almost knocked the solar production to nothing for one day (about 10% of non-smoke production) and cut production to less than half for several days in the last part of the month.

The two trend lines show how production averaged over the month, with and without the smoke days included. As you can see, the trend line without the smoke days tends to be about 3 KWhrs higher than the trend line with smoke days included. If the total for the month is estimated from the non-smoke trend, the power production is about 540 KWhrs. Using the trend line with smoke days included, the total is about 465 days. So, the smoke days cut about 75 KWhrs, or about 14%. In an industrial scale setup, that would be a lot of power lost, and a lot of money lost.

So, it is ironic that one of the effects of climate change can be to reduce the output of solar power, via forest fire smoke and other warming-related air pollution. It is almost like that Simpsons episode, where Mr. Burns puts a solar shade over Springfield, to produce more money for his nuclear power plant. Of course there is no oil company conspiracy here, just nature reminding us to be mindful of the unintended consequences of ignoring our environment.

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Now that you have read about the effect of raging forest fires, you should relax and take a mental road trip to the seaside. Newfoundland would be a great place for that.