Is the End Approaching for Chapters and Barnes and Noble

Is the End Approaching for Chapters and Barnes and Noble? - Sales, Expenses and Income

A few weeks ago (late June 2020), The Globe and Mail reported that Chapters/Indigo, Canada’s largest bookseller was facing financial hardship.  This was credited, in part, to the lockdown of bookstores and other retailers during the Covid-19 pandemic, during the spring.  That being said, the financial period in question didn’t actually include the lockdown; trouble was already there, which the lockdown was likely to exacerbate.

The lockdown is interesting, however.  Physical bookstores often use the face-to-face contact and the touch, look and feel of print books as selling points.  Now those factors are precisely the things people want to avoid during a pandemic.

The graph above shows the company’s sales over the past two decades or so, adjusted for inflation (CPI).  Sales were on an upward curve until about 2008, when they flattened then fell.  Two things happened at that time, the financial crisis (and ensuing recession) and the launch of the Kindle eBook (and related products, including Chapters own Kobo, which they later sold).  Sales then picked up quite nicely until about 2018, when they once more fell off a cliff.  It’s not clear what the causative factor might have been – perhaps it was related to a generalized drop in book prices, associated with the continuing penetration of e-books into the print business along with the closing of bookstores that didn’t drive much business.   

Interestingly almost a year earlier (June 8 2019) The Globe and Mail also reported that a U.S. hedge fund was to buy the American bookseller Barnes and Noble, the largest bookstore chain in America.  That meant that it ceased being a publicly traded stock, and is 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.  At least so far, Barnes and Noble is still in business, though now that it is private, its sales and expenses are no longer publicly available.

The graph below shows sales for both companies over past 20 years or so, adjusted to 2019 constant dollars in the appropriate currencies (the figures come from the annual reports, available on their websites).  Since the two countries differ by about a factor of ten, each company has a different y-axis.  I should note that stitching together time series like these is a bit tricky – there are frequent restatements of numbers, and entities such as big corporations tend to morph a bit over two decades, buying and selling new assets to add to and subtract from the business.

As you can see, the two companies fates were pretty similar until the 2008 recession when Barnes and Noble first fell, then recovered nicely while its main U.S. competitor, Borders was failing.  Since about 2012, however, it began another steep decline and was eventually scooped up by a hedge fund in 2018.

Chapters seemed to ride out that recession rather well, but then ran into trouble in about 2011.  That may have been related to the uptake of e-books, or the effect of falling oil prices on the Canadian economy.  In any case, it recovered during the 2014-18 period, but has since went into its own steep decline.

The next graph shows the same information, but in a different way, scaling sales for each company relative to sales in 1999, the beginning of the time series.  The interesting feature here is the comparison of B&N in 2015-2018 to Chapters in 2018-2020.  During those intervals, each company lost about 20% of sales as stated with this index number measure (B&N from 0.93 to 0.74, Chapters from 1.37 to 1.18).

So, the question is, will Chapters end up like Barnes and Noble, either bought by a hedge fund or simply go out of business.  It has managed to get through some fairly wild swings of fortune over the past decade or so.  However, using this measure, its sales are about back to where they were in  2000.  Furthermore, the graphical comparison with Barnes and Noble cannot be reassuring.

The next graph shows their net operating income (Sales minus Expenses) over that time period (note that this doesn’t account for taxes and other costs that eat into profits).  If anything, the picture for Chapters is even more alarming, as the fall-off over the past 3 years is steeper than that suffered by B&N before the hedge fund takeover.  In addition, Chapters has lost money as often as it has made money over the past nine years.

The last graph shows Operating Income as a Percentage of Sales, a rough measure of return on investment.  The last two years have seen losses of about -5% and -7%, though the previous three years showed decent returns of about +5%.  In fact, over the time period of 2011-2020, the simple average on this R.O.I. measure has been only about 0.4%, which is barely breaking even.  That’s actually very close to what happened to Barnes and Noble over that time period, until it was taken over by the hedge fund.

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.

Should Barnes and Noble and Chapters go out of business (B&N is hardly safe, under the umbrella of a hedge fund), that would have tremendous reverberations throughout the book world.  They are the main U.S. and Canadian vectors for getting print books in the hands of readers, so their absence would leave gaping holes 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.

And here’s XKCD on the limited power of a 2% return on investment (let alone 0.4%):

-----------------------------------------------------------------------------------------------------------------
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. 

---------------------------------------------------------------------------------------

Alternatively, why not read a nice Science Fiction Romance.

Kati of Terra Book 1 – Escape from the Drowned Planet (on Amazon, Kindle and Soft Cover)

Go on a romantic adventure, a sort of spaceship and planet-side road trip, while escaping from dangerous slavers, with our gal Kati of Terra and her companion Mikal (and, of course her ever helpful but cantankerous Granda node):

Amazon U.S:  http://www.amazon.com/gp/product/B00811WVXO

Amazon U.K.: http://www.amazon.co.uk/gp/product/B00811WVXO

Amazon Canada: https://www.amazon.ca/dp/B00811WVXO

Amazon Germany: https://www.amazon.de/dp/B00811WVXO

Amazon Australia: https://www.amazon.com.au/dp/B00811WVXO

Amazon Japan: https://www.amazon.co.jp/dp/B00811WVXO

Amazon India: https://www.amazon.in/dp/B00811WVXO

Amazon Spain: https://www.amazon.es/dp/B00811WVXO

 Amazon France: https://www.amazon.fr/dp/B00811WVXO

Kati of Terra: Book One – Escape from the Drowned Planet

In saving her small son from alien abductors, a 24-year-old Earth woman, Katie, finds herself abducted instead. She awakens from a drug-induced coma on a spaceship, in a room full of children, both human and alien, and two other women, younger than she is. The young women adapt to the situation as best they can, keeping the youngsters calm and entertained. But, when a drugged alien man wearing a uniform is added to the captive cargo, it becomes clear that this is an intergalactic slave operation.

The slave traders implant their captives with “translation nodes” in order to allow communication among various groups. These are living entities, normally docile, merely enhancing certain brain functions, such as language acquisition. However, Katie discovers that she has accidentally received a very special “granda node”, a long-lived node with its own cantankerous personality, including a fondness for criminality and lethal weaponry. Fortunately for Katie, it also values its freedom. With its help, she escapes on a fringe planet, dragging the peace officer along—also at the granda’s suggestion.

She finds herself on a strange world, with a somewhat deranged personality, quite possibly a killer, in her head, and partnered with a man from an advanced civilization who abhors killing. He is a Federation Peace Officer, captured by the slavers while attempting to bring them to justice. His task is complicated by the fact that he has sworn to avoid the taking of sentient life during the performance of his duties. He can and does, however, make vigorous use of non-lethal weaponry. Since, before leaving the ship, Katie had promised to help her co-captives gain their liberty, she and the alien peace officer find that they have a common cause.

But first they must find their way off the primitive planet and get to the Federated Civilization, avoiding the slavers who have been left on the planet to re-capture them. Their flight is complicated by the fact that the planet has had a global warming catastrophe some centuries back – the locals refer to it as the Drowned World. This has forced the inhabitants to revert to a pre-industrial state of development; however, they are a wily and resourceful people, mostly helpful, but they can also be dangerous.

Kati (to mark her escape, she adopts a slight name change) and Mikal seek a Federation beacon, which had been hidden on this planet ages ago, to aid in situations such as this, (in accord with a longstanding Federation policy for fringe worlds). They must embark on an arduous trek across two continents and an ocean, seeking the temple that holds the beacon. They travel on foot, by cart, by riverboat, by tall sailing ship, and on pack animals, always pursued by the dangerous slavers.

They must rely on their wits, guile, charm and acting abilities to avoid recapture, while their chasers have advanced technology and ruthlessness on their side. Fortunately, they are able to make many friends who help them along the way, and their quest becomes a series of adventures, both frightening and funny, and involving a cast of engaging characters.

To complicate matters, Kati finds herself falling in love with Mikal, the strange, handsome and amusing alien. He seems to be reciprocating, though they both struggle against an untimely romantic entanglement.
Will Kati and Mikal escape from the Drowned Planet? Can they ultimately bring the slavers to justice, as Mikal has sworn to do? Can they free the remaining captives of the slavers, as Kati has promised to do? Read this book and the rest of the series to find out all.

At about 200,000 words (equivalent to a paperback of about 400 pages), the book is an excellent value.