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”?
Some Recent News from Barnes and Noble, Chapters Indigo and Penguin Random House Canada
Whither Chapters 3 (and whither Barnes and Noble)
Whither Chapters 2 (and Whither Barnes and Noble too)
Whither Chapters (or Wither Chapters?)
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.
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
Germany: https://www.amazon.de/dp/B07NMR9WM8
Australia:
https://www.amazon.com.au/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.
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
Germany: https://www.amazon.de/dp/B07BH7WBQ1
Australia:
https://www.amazon.com.au/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.
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.
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