BARNES & NOBLE INC BKS
March 09, 2015 - 9:36am EST by
andreas947
2015 2016
Price: 25.00 EPS 0 0
Shares Out. (in M): 75 P/E 0 0
Market Cap (in M): 1,870 P/FCF 10 9
Net Debt (in M): -220 EBIT 0 0
TEV: 1,650 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Retail
  • Potential Spin-Off
 

Description

 

Barnes & Noble, Inc. (BKS)  

 

 

 

Summary

 

 

 

Our fund generally focuses on smaller companies with “Ft. Knox” balance sheets and large and sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

 

Barnes & Noble (BKS) is the dominant bookstore retailer in North America with a highly cash-generative business model, stable comp store sales in Retail segment, and growth opportunities in College segment.  BKS trades at about 0.3x revenues, 4.5x adjusted EBITDA for FYE April 2015, and a 10% unleveraged free cash flow yield with an established market position in both its Retail and College segments.  Importantly, BKS has a conservative balance sheet, with net cash of about $300m expected at FYE April 2015.  We expect BKS to further build its net cash position over the next couple of years.  As net cash builds, we think it is very possible an aggressive share repurchase and/or dividend program to enhance shareholder value could be initiated.

 

MJS27 did an excellent write-up of BKS in February 2014 at about $16 per share (versus $25 per share today) but many positive events have occurred since then which we discuss below such that we think BKS is undervalued today.  Also, BKS will report Q3 earnings on March 10th and, while we are hopeful for more progress, our time horizon for this investment is closer to two years.

 

BKS recently announced plans to spin off its College segment into a separate publicly traded company by August 2015 and filed an S-1 related to this transaction.  Our analysis is on a consolidated basis for BKS three segments – Retail, College, and NOOK.  While the spin-off might help improve the overall valuation, we believe the most important factor in driving consolidated shareholder value will be the adjusted EBITDA performance of the three segments in FY15 and FY16.  This is where our analysis is focused.

 

We believe BKS gives investors an opportunity to participate in the strong cash flows of the dominant bookstore retailer in North America, with a well-entrenched market position, and one of the largest players in the college bookstore segment, which has good growth prospects.  We believe BKS management will continue to move aggressively to right-size NOOK’s cost structure and reduce the cash burn drag it currently places on the company.  We expect investors to increasingly focus on the prodigious cash generation of Retail and College segments over the next couple of fiscal years as losses at NOOK are further reduced.  We recognize Retail will never be a major growth business but we believe current prices undervalue its substantial cash generation capabilities.

 

We believe BKS can reduce NOOK’s adjusted EBITDA losses to about $50m in FYE April 2016 and generate consolidated adjusted EBITDA (including Retail, College, and NOOK) of about $380m for FYE April 2016, with a net cash position of about $500m at FYE April 2016.  Based on 6.5x adjusted EBITDA of about $380m plus about $500m of net cash, we believe BKS could have a market value of about $3b by FYE April 2016 or about $40 per share, roughly 60% higher than today’s share price of about $25 per share.

 

Three Segments: Retail, College, and NOOK

 

BKS has three business segments including Retail ($4.2b revenues and $340m adjusted EBITDA); College ($1.75b revenues and $100m adjusted EBITDA); and NOOK ($375m revenues and negative $160m adjusted EBITDA). 

 

Retail includes 658 bookstores, primarily under Barnes & Noble Booksellers trade name.  These stores generally offer a dedicated NOOK area, a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toy & Games, DVDs, Music, Gift, Magazine and Bargain items.  About 4% to 6% of Retail sales are from best-seller books.  Retail segment also includes the company’s ecommerce website, www.barnesandnoble.com and its publishing operation, Sterling Publishing.  Retail was 67% of total sales in FY14 with $4.3b in sales.  Retail core comp store sales (ex-NOOK) were down 3% in FY14.  Retail core comp stores sales improved to flat for 6mos of FY15 and were +1.7% for the holiday season of 2014.

 

College includes 714 stores that are primarily school owned stores operated under contracts by College and include sales of digital content within the higher education market through Yuzu.  College contracts are typically for five to ten years, but many contracts have a 90 to 120 day cancellation right.  College stores generally offer new, used, rental, and digital textbooks, course related materials, emblematic apparel and gifts, trade books, computer products, NOOK products, school and dorm supplies, and convenience and café items.  College was 27% of total sales in FY14 with $1.75b in sales.  College comp store sales were down by 2.7% in FY14 and improved to down 0.2% for 6mos of FY15.   College segment may offer growth opportunities as BKS notes that 55% of colleges still operate their own bookstores and College believes its out-sourcing alternative could be attractive to many of these self-operated stores.

 

College is one of the three largest players in the college bookstore industry.  College was acquired by BKS in 2009 from Leonard Riggio, BKS then-CEO, for about $460m net of cash acquired.  BKS issued two seller notes as part of the transaction, both of which have since been repaid.

 

NOOK is the company’s digital business, including the development and support of the company’s NOOK product offerings.   The digital business includes digital content such as eBooks, digital newsstand, apps, and sales of NOOK devices and accessories through Retail, College, and third parties.  NOOK was 5% of total sales in FY14 at $423m in FY14 and NOOK sales were down 35% in FY14 and were down 48% for 6mos of FY15.

 

Segment EBITDA results are detailed below:

 

 

 

Segment EBITDA

 

 

 

 

 

 

6 mos.

6 mos.

FYE 4/30 (mm’s)

 

FY10

FY11

FY12

FY13

FY14

FY14

FY15

                   

 B&N Retail

 

$337

$259

$324

$376

$354

$101

$92

 B&N College (a)

 

$25

$113

$116

$112

$115

$65

$48

 NOOK

   

($81)

($209)

($261)

($481)

($217)

($100)

($42)

 Total

   

$281

$163

$179

$7

$252

$66

$98

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. College was acquired in September 2009 for $460m net of cash acquired.

 

Stable Retail and College Adjusted EBITDA

 

Key to our thesis is the stable adjusted EBITDA generated by the Retail and College segments over the last several years.  Combined adjusted EBITDA for Retail and College has averaged close to $450m per year for FYE April 2012, 2013, 2014, and (we project) 2015.  This represents close to $1.8b of cumulative adjusted EBITDA from Retail and College over the last four FY’s, or about 120% of today’s EV.  We believe Retail and College’s adjusted EBITDA will remain resilient over the next few FY’s due to incremental growth strategies and tight expense controls. 

 

We believe the market for e-Readers, including Kindle and NOOK, flattened in 2013 and 2014, after several years or rapid growth.  We believe these may be niche products and that physical books will show considerable resiliency.  Retail and College comp store sales for year-to-date FYE April 2015 have been relatively stable.  Retail core comp store sales (ex-NOOK) were +1.7% for the 2014 holiday season.

 

Given its stable history, we believe BKS could borrow almost 4x adjusted EBITDA or more, representing almost its entire EV.  BKS has a $1b credit facility in place which is unused.  Our investments in situations where the company can borrow anywhere near the EV of the business have generally worked out quite well – this is not surprising given that credit markets are usually more conservative and disciplined than equity markets.

 

Over the past several years, BKS has invested adjusted EBITDA generated by Retail and College into its NOOK segment with poor results.  Cumulative adjusted EBITDA losses at NOOK from FY11 to FY14 were about $1b, or close to 65% of BKS current EV.

 

We believe Retail and College segment EBITDA for FYE April 2015 will be relatively flat with FY14 results ($450m of combined EBITDA) and NOOK segment EBITDA will be about negative $110m for about $340m of consolidated EBITDA for FYE April 2015.  We note that College will invest $15m to $20m in Yuzu, a new digital textbook product for students, in FYE April 2015.

 

Reduced NOOK Losses

 

BKS is aggressively downsizing its NOOK segment, moving to a more content-focused strategy.  BKS outsourced the hardware side of NOOK via a deal with Samsung in June 2014 where Samsung’s tablets combine with NOOK’s customized software to offer customers a NOOK by Samsung solution.  This has enabled BKS to reduce losses at NOOK and losses have been reduced by about 50% for six months of FYE April 2015, from $100m in adjusted EBITDA losses for six months of FY14 to $42m in adjusted EBITDA losses for six months of FY15.  And this was before the Microsoft/Pearson Repurchase Transaction.

 

CEO Michael Huseby was asked on the Q2 FY15 conference call, “Does this transaction with Microsoft, I know it just closed, but did this give you flexibility for another round of cost-cutting at NOOK that you couldn’t have done because of your obligations under the contract?”.  He responded, “Yes, we said that, I think we said that clearly.”  He continued later on: “So we have more operational flexibility which gives us a better opportunity to improve profitability at both NOOK digital and Retail…” 

 

Huseby is an ex-CFO with Cablevision and has Liberty Media ties and actually ran the NOOK segment before his current role and we expect him to be very logical in right-sizing NOOK’s cost structure to its current revenue potential (which seems to be declining rapidly).

 

Microsoft/Pearson Repurchase Strengthens Balance Sheet and Enables Further Rationalization

 

In December 2014, BKS repurchased the $385m of preferred shares in NOOK Media owned by Microsoft and Pearson for about $150m, consisting of $75m in cash and 3.3m shares of common stock.  This transaction substantially improved BKS balance sheet: (1) it eliminates the Preferred Membership Interests at NOOK Media; (2) it eliminates the put option overhang; (3) it eliminates about $200m in commercial financing liabilities; and (4) it eliminates obligations for international development.   

 

The Repurchase Transaction gives BKS increased ability to right-size NOOK’s cost structure and enables further cost reductions.  We expect NOOK’s adjusted EBITDA losses to be reduced by about 50% in FYE April 2015 to about $110m and further reduced to about $50m in FYE April 2016.  In the event BKS sells NOOK within three years, Microsoft and Pearson have the right to participate pro rata (about 28%) in the sale proceeds. 

 

The Repurchase Transaction in December 2014 and the Samsung partnership in June 2014 reflect a more rational and conservative approach to NOOK with a focus on selling eBook content rather than hardware.  NOOK sales currently represent a small portion of total BKS sales and do not justify the current expense structure.

 

Spin-off of College from Retail and NOOK

 

BKS recently announced it would spin-off its College segment from Retail and NOOK into a separate public company by August 2015, citing College’s growth opportunities and unique positioning with college students.  We believe this strategy makes some sense and that College could trade at a higher adjusted EBITDA multiple, given its superior growth opportunities.

 

We believe BKS will focus on improving sales trends in its Retail segment and reducing NOOK’s cash burn towards break even.

 

BKS has stated there are continuing discussions with potential partners for the NOOK business, including the possibility of funding for the NOOK entity.  However, given the weak sales results for NOOK to date, including the Samsung by NOOK devices, we are not ascribing any value to NOOK at this point.

 

Retail Has Solid 2014 Holiday Sales While NOOK Does Poorly

 

BKS reported sales results for the nine-week period ended January 3, 2015 and these were solid for Retail, with core comp store sales (excluding NOOK) up 1.7% compared to prior year.  Based on these results, BKS updated its guidance for FYE April 2015 to flat core comp store sales for Retail.  We believe this indicates continued stabilization of physical book sales and growth in educational toys and games and gifts.

 

Conversely, NOOK sales were poor with total sales of $56m for the nine week period down 55% versus prior year.  NOOK device sales were $29m, down 68% versus prior year and digital content sales were $27.4m, down 25% versus prior year. 

 

Valuation

 

BKS has about 75m fully diluted shares outstanding.  This assumes conversion of a convertible preferred of about $195m convertible at $17 per share and also about 3.3m shares issued to Microsoft and Pearson as part of the NOOK repurchase transaction completed in December 2014.  BKS trades at about $25 per share for a market cap of about $1.87b fully diluted.  We expect BKS to have a net cash position of about $300m at FYE April 2015 for a total enterprise value (EV) of about $1.57b.  For FYE April 2015, we expect adjusted EBITDA of about $340m (including EBITDA losses from NOOK of $110m).  We expect free cash flow (cash from operations less capital expenditures) of at least $150m for FYE April 2015.  BKS is trading at an unleveraged FCF yield of about 10% and an adjusted EBITDA multiple of about 4.5x on our FYE April 2015 estimate. 

 

We believe BKS can reduce NOOK’s adjusted EBITDA losses to about $50m in FYE April 2016 and generate consolidated adjusted EBITDA (including Retail, College, and NOOK) of about $380m for FYE April 2016, with a net cash position of about $500m at FYE April 2016.  Based on 6.5x adjusted EBITDA of about $380m plus about $500m of net cash, we believe BKS could have a market value of about $3b by FYE April 2016 or about $40 per share, roughly 60% higher than today’s share price of about $25 per share.

 

Management and Strategy

 

Michael Huseby became CEO of BKS in early 2014 after serving as CFO of BKS and CEO of the NOOK segment the prior couple of years.  He was formerly CFO at Cablevision, a large cable TV operation.  He has long-term ties to Liberty Media and we believe he is highly focused on profitability and free cash flow generation.

 

 

 

BKS’s strategy has focused on: (1) growing revenues at Retail through new categories such at educational toys and games and new events to drive traffic into stores; (2) growing revenues at College through new contract acquisitions and new products and services oriented towards students and faculties; and (3) shifting NOOK towards a less costly and capital-intensive software-oriented strategy and continuing to rationalize NOOK’s cost structure to better align it with the revenue base.

 

 

 

Competition; Retail vs. Online; eBooks vs. Physical books

 

 

 

Competitive threats to BKS include: (1) increased online sales of books by Amazon and (2) increased sales of eBooks versus physical books.  Both trends have had an impact on Retail sales over the past several years.

 

 

 

We believe in 2014 in the U.S. about half of physical book sales were in stores and half were purchased online.  Bookstores have consolidated significantly over the past several years in the U.S. as online sales have taken a larger share of the market, most notably with the closing of Borders stores in 2011. Amazon’s online business model has been operating for several years and while it will continue to pressure Retail results going forward, we think Retail’s stable financial results over the past several years show that it can likely operate reasonably in an environment against Amazon.  CEO Huseby has cited BKS “more personal relationship with customers” as a key differentiator versus Amazon.  We believe there is a significant segment of the market that will continue to purchase books in stores.

 

 

 

With regard to eBooks, in 2013 and 2014, demand for e-Readers and eBooks has slowed down significantly, with market growth for 2013 and 2014 estimated to be flat.  NOOK sales trends have been extremely poor.  There have been some recent studies that indicate demand for physical books versus eBooks may be more resilient than previously expected.  The jury is still out on this issue but we believe physical book demand may have more staying power than expected.

 

 

 

Major Shareholders

 

 

 

BKS has some smart shareholders including Abrams Capital (6%) and Dan Tisch (8%).  While this does not guarantee a successful investment, we are encouraged by their presence, although they are invested at lower prices. 

 

 

 

Attractive Working Capital Model and Seasonality

 

 

 

BKS has an attractive working capital model. BKS’ inventories are significantly offset by accounts payable (generally 65% to 70% of inventories).  BKS vendors effectively finance most of the inventory investment, resulting in a higher ROIC, less capital-intensive business model.

 

 

 

BKS business is seasonal with disproportionate Retail revenues generated during the holiday season (FY Q3) and disproportionate College revenue generated during the back-to-school Rush period in September (FY Q2).  Q3 is the strongest quarter for cash flow and adjusted EBITDA due to holiday sales in Retail segment.  In Q4, payments are made to trade creditors and the net cash position declines modestly at FYE.

 

 

 

 

 

Strong Cash Flow Generation and Solid Business Model

 

 

 

BKS has reasonable capital expenditure and working capital requirements. We expect BKS to achieve adjusted EBITDA of $340m consolidated (including Retail, College, and NOOK) for FYE April 2015.  We believe adjusted EBITDA could grow to $380m in FYE April 2016.  Capital expenditures over the past few years have averaged about $150m per year.  Working capital has remained fairly stable.  Retail and College have achieved steady gross margins of about 30% and 25% respectively over the past several years. 

 

 

 

From FY11 to FY14, cumulative adjusted EBITDA from the Retail and College segments was about $1.8b or 120% of today’s EV.  BKS’s business model, excluding NOOK, enables it to consistently generate cash.  Even in FYE April 2010, in a very difficult economy, Retail generated almost $340m of adjusted EBITDA.  We believe it would not be unreasonable for this cash-generative business to trade at 6.5x adjusted EBITDA, assuming stable core retail sales.

 

 

 

Strong Balance Sheet and Expected Continued Build Up in Net Cash Position

 

 

 

BKS has a strong balance sheet with a net cash position of about $200m at FY15 Q2 ended November 2014.  We expect the net cash position to build further to about $300m at FYE April 2015 and further to $500m at FYE April 2016. 

 

 

 

BKS was able to generate solid cash flow even in the difficult economic conditions of 2009-10 and while absorbing NOOK losses.  We expect net cash to build at close to $200m per year over the next couple of years, and this could be conservative.  We believe the continued build up in net cash will highlight BKS’s attractive business model and could result in an improved valuation.

 

 

 

Solid ROIC Business Model

 

 

 

BKS has a solid ROIC business model with reasonable capital expenditures and working capital investments.  As discussed, vendor payables mostly offset the inventory investment.  We calculate ROIC for BKS as adjusted EBITDA less capital expenditures divided by sum of the net working capital investment plus net book value of PPE.  For BKS, this is about $350m of adjusted EBITDA - $150m of capital expenditures or about $200m in the numerator, divided by net working capital of about $350m plus $350m net book value of PPE, for a total of $700m in the denominator.  $200m/$700m is about a 40% ROIC.

 

 

 

FY15 Year to Date Retail and College Results Solid

 

 

 

The Company’s results for six months of FYE April 2015 were solid with Retail core comparable sales and College comp stores sales both positive for Q2.  Total sales for six months of FY15 were $2.9b versus $3.1b in prior year.  Consolidated EBITDA improved to $97m versus $67m in prior year, up 44% due primarily to reduced adjusted EBITDA losses at NOOK, which were negative $42m in FY15 versus negative $100m in FY14.  Six months of FY15 adjusted EBITDA for Retail was $92m versus $101m in prior year, due primarily to expense deleverage on lower sales.  Adjusted EBITDA for College was $48m versus $65m in prior year, due primarily to increased investments in Yuzu and other areas.

 

 

 

We believe the stability of 2014 can continue into 2015 and beyond, driven by stable revenues in Retail and growth in College.  BKS should also benefit from well-controlled operating expenses and capital expenditures, and a favorable working capital model, all of which should support adjusted EBITDA and FCF over the next few years.

 

 

 

Excellent Potential for Share Repurchase or Dividends or Niche Acquisitions

 

 

 

As BKS balance sheet gets stronger, we believe a major share repurchase program and/or dividend becomes a strong possibility.  Strong cash generation and a conservative balance sheet provide multiple levers to drive shareholder value. 

 

 

 

Pension Costs

 

 

 

BKS pension plan is fairly well-funded so pension expenses and cash contributions are not onerous going forward.

 

 

 

Conclusion and Target Price

 

 

 

Based on 6.5x our adjusted EBITDA of $380m in FYE April 2016 and  about $500m in net cash at FYE April 2016, we believe BKS could trade for a market value of about $3b or about $40 per share versus $25 per share today (+60%).  We believe 6.5x adjusted EBITDA is possible if sales trends for Retail and College segments remain stable (flat to slightly positive comp store sales) with reduced NOOK losses.  Further, we believe the solid market position of Retail and College’s growth potential could prove attractive to a strategic or financial acquirer.

 

 

 

 

 

Major Shareholders

Shares

%

Leonard Riggio

12,000,000

20.0%

Daniel Tisch

5,030,000

8.4%

Dimensional Fund Advisors LP

4,900,000

8.19%

Abrams Capital Management L.P.

4,100,000

6.83%

Vanguard Group, Inc. (The)

3,874,954

6.39%

JP Morgan Chase & Company

2,734,627

4.54%

BlackRock Fund Advisors

2,372,814

3.94%

Cheapeake Partners Management Co Inc./Md

2,214,709

3.68%

Towerview LLC.

1,991,250

3.31%

Pine River Capital Management L.P.

1,875,000

3.11%

State Street Corporation

1,406,288

2.33%

Gendell, Jeffrey L.

1,314,403

2.18%

 

 

 

Price per share

$25

Shares out. (1)

75m fully diluted

Market value

$1.87b

52 week range

$15.38

$26.22

 

  1. Assumes conversion of $195m of convertible preferred stock at $17 per share.

 

Avg Daily Volume

690,000

 

Income statements

 

 

     3mos

   

 

 

 

     6mos

     6mos

   FYE 5/3

2008

2009

2009

2010

2011

2012

2013

2014

2014

2015

Sales

$5,287

$5,122

$1,105

$5,808

$6,999

$7,129

$6,839

$6,381

$3,064

$2,924

Gross profit

$1,607

$1,581

$332

$1,687

$1,801

$1,918

$1,683

$1,858

$830

$843

SG&A expense

$1,405

$1,438

$335

$1,602

$1,857

$1,971

$1,902

$1,822

$872

$845

EBITDA

$371

$317

$43

$300

$189

$185

$14

$259

$70

$101

EBIT

$202

$143

($3)

$85

($56)

($53)

($219)

$36

($42)

($2)

Net income

$135

$76

($2)

$43

($69)

($65)

($158)

($47)

($74)

($16)

Diluted EPS

$2.08

$1.29

($0.04)

$0.75

($1.22)

($1.34)

($3.02)

($1.12)

($1.40)

($0.43)

 

 

 

Cash flow stmts

 

 

3mos

           x

           x

 

 

 

    6mos

    6mos

   FYE 5/3

2008

2009

2009

2010

2011

2012

2013

2014

2014

2015

Net income

$135

$85

($2)

$37

($74)

($65)

($158)

($47)

($74)

($16)

Dep & amort

$169

$174

$46

$215

$245

$238

$233

$223

$112

$103

Non cash adjust

 $34

 $42

 ($1)

($63)

($31)

($32)

($50)

$76

($6)

($4)

Working capital chgs

 $90

 $73

 ($190)

($58)

$59

($165)

$92

$68

$114

($28)

Cash fr operations

$429

$376

($147)

$131

$199

($24)

$117

$320

$146

$55

Capital expenditures

($194)

($192)

 ($22)

($128)

($111)

($164)

($166)

($135)

($70)

($73)

Dividends

 ($39)

 ($51)

 ($14)

($57)

($44)

($7)

($15)

($15)

($4)

($8)

Share repurchases

 ($248)

 ($201)

 $0

($3)

($2)

($4)

($6)

($5)

($8)

($3)

Other

 $0

 $0

 

($188)

$0

$195

$430

$85

$42

$42

Est. free cash flow

$110

$58

#VALUE!

$3

$88

($188)

($49)

$185

$76

($18)

 

 

 

Balance sheets

     

           x

           x

         

   FYE 5/3

2008

2009

2009

2010

2011

2012

2013

2014

11/1/14

 

Cash

 

  $282

 $87

$61

$59

$268

$161

$340

$285

 

Total assets

 

 $2,879

 $2,664

$3,706

$3,596

$634

$3,732

$3,538

$3,836

 

Total debt

 

 $0

 $0

$360

$313

$10

$9

$232

$64

 

Preferred stock

 

$0

$0

$0

$0

 

$575

$575

$580

 

Shareholder equity

 

 $923

 $903

$903

$820

$493

$455

$631

$628

 
     

 

             

Shares out. Basic

 

 

56.1

56.2

56.6

57.3

58.2

59.0

59.3

 
                     

Core Retail Comp store sales

 

 

-5.3%

-8.3%

0.7%

0.1%

-3.1%

 

 0.0%

College Comp store sales

 

 

 

 

 

-1.2%

-2.7%

 

-0.2%

Total stores (Year-end)

   

1,357

1,341

1,338

1,361

1,361

865

843

Adjusted EBITDA margin

 

3.9%

5.2%

2.7%

2.6%

0.2%

4.1%

2.3%

3.5%

Gross margin

   

30.0%

29.0%

25.7%

26.9%

24.6%

29.1%

27.1%

28.8%

 

 

 

Valuation & Valuation Ratios

         

Market value

$1,875

 

Enterprise value / EBITDA

5.3

Net debt

($221)

 

Enterprise value / EBIT

 

19.8

Preferred stock

$0

 

Enterprise value / Cash fr Ops

6.6

Enterprise value

$1,650

 

Ent. value / Free cash flow

16.6

       

Enter value / Sales

 

24%

               

 

 

 

     

       FYE

       FYE

       FYE

       FYE

       FYE

   6mos

   6mos

 Sales by segment

May 10

Apr 11

Apr 12

Apr 13

Apr 14

Oct 13

Oct 14

                   

B&N Retail

 

$4,401

$4,927

$4,853

$4,568

$4,295

$1,929

$1,843

B&N College

 

$834

$1,778

$1,744

$1,763

$1,748

$964

$977

NOOK

   

$573

$695

$934

$780

$506

$262

$134

Elimination

 

 

($402)

($401)

($273)

($168)

($91)

($30)

Total

   

$5,808

$6,998

$7,130

$6,838

$6,381

$3,064

$2,924

                   

Sales by product line

                   

Media

 

 

 

 

66%

67%

68%

69%

71%

Digital

   

 

 

15%

12%

9%

9%

5%

Other

   

 

 

19%

21%

23%

22%

24%

Total

   

0%

0%

100%

100%

100%

100%

100%

                   

Depreciation and amortization

                   

B&N Retail

 

 

 

$163

$149

$126

$64

$54

B&N College

 

 

 

$45

$47

$48

$23

$25

NOOK

   

 

 

$25

$31

$43

$21

$20

Total

   

$0

$0

$233

$227

$217

$108

$100

                   

Operating profit

                   

B&N Retail

 

 

 

$161

$227

$228

$37

$37

B&N College

 

 

 

$71

$65

$67

$42

$23

NOOK

   

 

 

($286)

($512)

($260)

($121)

($63)

Total

   

$0

$0

($54)

($220)

$35

($42)

($3)

                   

Capital expenditures

                   

B&N Retail

     

$88

$51

$67

$34

$35

B&N College

     

$41

$39

$38

$21

$25

NOOK

       

$35

$76

$30

$15

$13

Total

       

$164

$166

$135

$70

$73

                   
                   

 EBITDA

               
                   

 B&N Retail

 

$337

$259

$324

$376

$354

$101

$92

 B&N College

 

$25

$113

$116

$112

$115

$65

$48

 NOOK

   

($81)

($209)

($261)

($481)

($217)

($100)

($42)

 Total

   

$281

$163

$179

$7

$252

$66

$98

                   
                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarterly Balance Sheets

       

FYE

     

FYE

   

July 12

Oct 12

Jan 13

Apr 13

July 13

Oct 13

Jan 14

Apr 14

July 14

Oct 14

                   

Cash and equivalents

$20

$470

$214

$160

$80

$297

$490

$340

$180

$285

Receivables

$154

$234

$396

$149

$151

$193

$297

$144

$120

$158

Merchandise inventories, net

$1947

$1797

$1785

$1411

$1748

$1592

$1442

$1235

$1684

$1545

Prepaid expense and other

$192

$144

$116

$117

$82

$165

$136

$117

$79

$174

Deferred taxes

 

$135

$126

$210

$210

$190

$170

$145

$142

$142

 

   Total current assets

$2313

$2780

$2637

$2047

$2271

$2437

$2535

$1981

$2205

$2304

 

Net PPE

$597

$585

$573

$585

$562

$555

$530

$491

$479

$470

 

Goodwill

$519

$515

$514

$495

$495

$495

$495

$493

$493

$493

Intangible assets

$563

$558

$553

$548

$544

$539

$533

$529

$524

$520

Other non- current

$63

$57

$63

$57

$55

$52

$48

$45

$48

$48

 

   Total assets

$4055

$4495

$4340

$3732

$3927

$4078

$4141

$3539

$3749

$3835

 

Accounts payable

$1289

$1348

$1257

$805

$1196

$1226

$1136

$735

$1101

$1184

Accrued liabilities

$540

$526

$617

$569

$512

$544

$629

$503

$402

$434

Gift card liabilities

$313

$297

$387

$341

$329

$314

$392

$357

$339

$328

Short term note

$0

$0

$0

$0

$0

$127

$127

$127

$127

$0

 

   Total current liabilities

$2142

$2171

$2261

$1715

$2037

$2211

$2284

$1722

$1969

$1946

 

Long term debt

$303

$338

$0

$77

$8

$105

$0

$0

$0

$64

Long term deferred taxes

$242

$267

$247

$231

$246

$231

$256

$212

$220

$217

Other long term liabs

$359

$393

$421

$420

$437

$323

$331

$367

$367

$400

 

Redeemable preferred shares

$193

$193

$193

$194

$194

$194

$194

$195

$195

$195

Preferred Member interests in NOOK

$0

$289

$381

$382

$382

$383

$383

$383

$384

$384

 

Shareholders’ equity

$815

$843

$837

$714

$623

$631

$691

$659

$614

$628

 

 

 

 

 

 

 

 

 

Quarterly  Consolidated Income Statements

 

       

FYE

     

FYE

   

Jul  12

Oct 12

Jan 13

Apr 13

Jul 13

Oct 13

Jan 14

May 14

Aug 14

 Oct 14

 

 

Sales

$1454

$1885

$2224

$1277

$1300

$1734

$1996

$1322

$1236

$1688

Costs of sales and occupancy

$1038

$1402

$1670

$1046

$961

$1272

$1392

$898

$854

$1228

Gross profit

$416

$483

$554

$231

$369

$462

$604

$424

$382

$460

 

 

Selling and admin expenses

$410

$416

$494

$356

$377

$386

$430

$413

$353

$392

Depreciation and amort expense

$58

$58

$56

$56

$55

$54

$54

$54

$50

$50

 

 

Operating profit

($52)

$9

$4

($180)

($63)

$22

$120

($43)

($21)

$19

Interest expense

$9

$9

$9

$10

$8

$8

$8

$7

$6

$5

Income before taxes

($61)

$0

($5)

($190)

($71)

$14

$112

($49)

($27)

$14

 

 

Income taxes

($21)

$0

($1,432)

($75)

$15

$1

$48

$12

$2

$1

Net income

($40)

$0

$1,427

($115)

($86)

$13

$64

($37)

($29)

$13

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarterly Segment Income Statements

 

 

Jul 12

Oct 12

Jan 13

Apr 13

Jul 13

Oct 13

Jan 14

Apr 14

Jul 14

Oct 14

 

 

Retail Sales

$1119

$996

$1505

$948

$1008

$921

$1410

$956

$955

$888

College Sales

$221

$773

$517

$252

$226

$738

$486

$298

$226

$751

NOOK Sales

$192

$160

$316

$112

$153

$109

$157

$87

$70

$64

Elimination

($79)

($45)

($114)

($35)

($58)

($33)

($58)

($19)

($15)

($16)

Total

$1454

$1885

$2224

$1277

$1330

$1734

$1996

$1322

$1236

$1688

 

 

Retail Gross Profit

$337

 $293

$504

$262

$301

$270

$471

$297

$295

$266

College Gross Profit

$51

$168

$110

$76

$50

$168

$117

$103

$47

$174

NOOK Gross Profit

$26

$19

($60)

($107)

$17

$24

$16

$25

$41

$21

Total Gross Profit

$414

$481

$554

$231

$368

$462

$603

$424

$383

$460

 

 

Retail SG&A Expense

$262

$265

$288

$208

$236

$234

$271

$243

$229

$240

College SG&A Expense

$65

$80

$76

$72

$69

$84

$81

$89

$79

$94

NOOK SG&A Expense

$83

$70

$130

$75

$72

$69

$78

$81

$45

$58

Total SG&A Expense

$410

$416

$494

$355

$377

$386

$430

$413

$353

$392

 

 

Retail EBITDA

$75

$28

$216

$54

$65

$37

$200

$53

$66

$25

College EBITDA

($14)

$88

$34

$4

($19)

$84

$35

$14

($32)

$80

NOOK EBITDA

($57)

($51)

($190)

($182)

($55)

($45)

($62)

($56)

($5)

($38)

Total EBITDA

$4

$65

$59

($125)

($9)

$76

$173

$11

$30

$68

 

 

 

 

 

 

 

 

 

 

 

Retail Core Comp Store Sales

+7.6%

+1.8%

-2.2%

-5.8%

-7.2%

-3.7%

-0.5%

-1.9%

-0.4%

+0.5%

College Comp Store Sales

-2.0%

-0.5%

-5.2%

7.5%

-1.2%

-3.6%

-4.0%

+2.6%

-2.0%

+0.4%

 

 

 

 

 

 

 

 

 

 

 

Net income

 

   

 

     

 

   
                       

 

 

 

 

 

Catalysts

 

  1. Low valuation (10% FCF yield unleveraged; 4.5x FYE Apr 2015 EBITDA; 0.3x LTM revs).

  2. Steadily build up in net cash position from $300m at FYE April 2015 to $500m at FYE April 2016.

  3. Reduced operating expenses at NOOK decrease NOOK adjusted EBITDA losses.

  4. Projected FYE April 2016 adjusted EBITDA of $380m due to reduced losses at NOOK and stable results at Retail and College.

  5. Recognition of highly cash-generative business model trading at low multiple.

  6. Share repurchases and dividends from excess cash and FCF generation.

  7. Possible acquisition of BKS by a strategic or financial purchaser.

  8. Increased analyst coverage and recognition of BKS’s attractive market position.

 

Risks

 

 

 

  1. The U.S. and/or global economy declines, impacting BKS’s business model.

  2. BKS is unable to reduce NOOK losses as quickly as we expect.

  3. Purchases of physical books decline faster than we expect over the next few years.

  4. Amazon competitive pressure in online sales hurts Retail results more than expected.

  5. Change in relationship with vendor partners.

  6. Misallocation of capital into a poor acquisition.

  7. Management turnover.

  8. Large amount of stock options are outstanding; excessive management compensation

 

 

 

 

 

 

 

Disclaimer

 

 

 

Disclaimer:  We own shares of BKS.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but readers should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

See above

    sort by   Expand   New

    Description

     

    Barnes & Noble, Inc. (BKS)  

     

     

     

    Summary

     

     

     

    Our fund generally focuses on smaller companies with “Ft. Knox” balance sheets and large and sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

     

    Barnes & Noble (BKS) is the dominant bookstore retailer in North America with a highly cash-generative business model, stable comp store sales in Retail segment, and growth opportunities in College segment.  BKS trades at about 0.3x revenues, 4.5x adjusted EBITDA for FYE April 2015, and a 10% unleveraged free cash flow yield with an established market position in both its Retail and College segments.  Importantly, BKS has a conservative balance sheet, with net cash of about $300m expected at FYE April 2015.  We expect BKS to further build its net cash position over the next couple of years.  As net cash builds, we think it is very possible an aggressive share repurchase and/or dividend program to enhance shareholder value could be initiated.

     

    MJS27 did an excellent write-up of BKS in February 2014 at about $16 per share (versus $25 per share today) but many positive events have occurred since then which we discuss below such that we think BKS is undervalued today.  Also, BKS will report Q3 earnings on March 10th and, while we are hopeful for more progress, our time horizon for this investment is closer to two years.

     

    BKS recently announced plans to spin off its College segment into a separate publicly traded company by August 2015 and filed an S-1 related to this transaction.  Our analysis is on a consolidated basis for BKS three segments – Retail, College, and NOOK.  While the spin-off might help improve the overall valuation, we believe the most important factor in driving consolidated shareholder value will be the adjusted EBITDA performance of the three segments in FY15 and FY16.  This is where our analysis is focused.

     

    We believe BKS gives investors an opportunity to participate in the strong cash flows of the dominant bookstore retailer in North America, with a well-entrenched market position, and one of the largest players in the college bookstore segment, which has good growth prospects.  We believe BKS management will continue to move aggressively to right-size NOOK’s cost structure and reduce the cash burn drag it currently places on the company.  We expect investors to increasingly focus on the prodigious cash generation of Retail and College segments over the next couple of fiscal years as losses at NOOK are further reduced.  We recognize Retail will never be a major growth business but we believe current prices undervalue its substantial cash generation capabilities.

     

    We believe BKS can reduce NOOK’s adjusted EBITDA losses to about $50m in FYE April 2016 and generate consolidated adjusted EBITDA (including Retail, College, and NOOK) of about $380m for FYE April 2016, with a net cash position of about $500m at FYE April 2016.  Based on 6.5x adjusted EBITDA of about $380m plus about $500m of net cash, we believe BKS could have a market value of about $3b by FYE April 2016 or about $40 per share, roughly 60% higher than today’s share price of about $25 per share.

     

    Three Segments: Retail, College, and NOOK

     

    BKS has three business segments including Retail ($4.2b revenues and $340m adjusted EBITDA); College ($1.75b revenues and $100m adjusted EBITDA); and NOOK ($375m revenues and negative $160m adjusted EBITDA). 

     

    Retail includes 658 bookstores, primarily under Barnes & Noble Booksellers trade name.  These stores generally offer a dedicated NOOK area, a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toy & Games, DVDs, Music, Gift, Magazine and Bargain items.  About 4% to 6% of Retail sales are from best-seller books.  Retail segment also includes the company’s ecommerce website, www.barnesandnoble.com and its publishing operation, Sterling Publishing.  Retail was 67% of total sales in FY14 with $4.3b in sales.  Retail core comp store sales (ex-NOOK) were down 3% in FY14.  Retail core comp stores sales improved to flat for 6mos of FY15 and were +1.7% for the holiday season of 2014.

     

    College includes 714 stores that are primarily school owned stores operated under contracts by College and include sales of digital content within the higher education market through Yuzu.  College contracts are typically for five to ten years, but many contracts have a 90 to 120 day cancellation right.  College stores generally offer new, used, rental, and digital textbooks, course related materials, emblematic apparel and gifts, trade books, computer products, NOOK products, school and dorm supplies, and convenience and café items.  College was 27% of total sales in FY14 with $1.75b in sales.  College comp store sales were down by 2.7% in FY14 and improved to down 0.2% for 6mos of FY15.   College segment may offer growth opportunities as BKS notes that 55% of colleges still operate their own bookstores and College believes its out-sourcing alternative could be attractive to many of these self-operated stores.

     

    College is one of the three largest players in the college bookstore industry.  College was acquired by BKS in 2009 from Leonard Riggio, BKS then-CEO, for about $460m net of cash acquired.  BKS issued two seller notes as part of the transaction, both of which have since been repaid.

     

    NOOK is the company’s digital business, including the development and support of the company’s NOOK product offerings.   The digital business includes digital content such as eBooks, digital newsstand, apps, and sales of NOOK devices and accessories through Retail, College, and third parties.  NOOK was 5% of total sales in FY14 at $423m in FY14 and NOOK sales were down 35% in FY14 and were down 48% for 6mos of FY15.

     

    Segment EBITDA results are detailed below:

     

     

     

    Segment EBITDA

     

     

     

     

     

     

    6 mos.

    6 mos.

    FYE 4/30 (mm’s)

     

    FY10

    FY11

    FY12

    FY13

    FY14

    FY14

    FY15

                       

     B&N Retail

     

    $337

    $259

    $324

    $376

    $354

    $101

    $92

     B&N College (a)

     

    $25

    $113

    $116

    $112

    $115

    $65

    $48

     NOOK

       

    ($81)

    ($209)

    ($261)

    ($481)

    ($217)