Another Makeover for B&N

Barnes & Noble has undergone lots of changes since Len Riggio first took over the bookstore chain in 1965, and it is heading toward what could be its most dramatic makeover since Riggio bought the B. Dalton chain. Although it is far from certain what will happen, B&N is in the early stages of evaluating the possible spinoff of its Nook business. In its announcement last week, B&N said it was considering reporting Nook has a separate business segment while also “pursuing strategic exploratory work to separate the Nook business.”

Both actions are aimed, in the words of CEO William Lynch, to “unlock” the value of the Nook franchise. It is doubtful, however, that simply providing analysts and investors a more detailed look at Nook’s business would give B&N the boost in the stock price it would want. For that, B&N would need to spin off the Nook into its own company. That is what happened in 2004 when B&N, partly in response to Wall Street pressure, spun off GameStop.

According to B&N, the Nook business is expected to generate about $1.5 billion in the current fiscal year, about 21% of B&N’s expected total sales of $7.0 billion to $7.2 billion. That revenue comes from four sources: devices, digital content, accessories, and warranties. If B&N just makes Nook a separate segment, it would carve out the digital content sold through BN.com and add it to the Nook unit. If, however, Nook became its own company, the digital content sales, which B&N estimates will be about $450 million this year, would presumably remain at BN.com. How a complete separation of the businesses would affect the Nook boutiques that B&N stores operate is also not clear, although it is likely the two companies would maintain close ties. B&N noted in its announcement that “a substantial portion” of the 70% increase in Nook unit sales over the holidays came from outlets outside of the B&N family.

While B&N is exploring the possibility of spinning off Nook, it is moving forward with its plan to sell its Sterling Publishing division. Sources have confirmed the rumors over the past few months that B&N has put Sterling on the block. B&N acquired Sterling in 2003 for $115 million at a time when Sterling had revenues of over $60 million. Today, its revenues are estimated at more than $80 million, although some of that comes from B&N’s proprietary publishing lines that it is likely to retain following the sale. While Sterling entered the fiction market a little over a year ago with the launch of the Silver Oak imprint, it is best known for its nonfiction titles centered on how-to, self-help, reference, and study aids. Among its imprints is Hearst Books, which publishes lifestyle titles under the brand names of various Hearst magazines. The company also has a children’s book division.

Although Sterling would make a great fit for Amazon Publishing, sources said it is highly unlikely B&N would do a deal with its archrival. Outside of Amazon, John Wiley, which loves branded nonfiction, is a possible buyer, and the purchase of Sterling could also help to fulfill Hachette’s desire to expand its American business. A private buyer is another possibility, one investment banker said. No matter who buys Sterling, the purchase price is likely to be close to one-times sales and below what B&N paid nine years ago.

If Sterling is sold and Nook spun off, that would leave B&N primarily as the owner of trade retail and college stores, both of which have solid online businesses. Nevertheless, that group of assets is unlikely to excite investors and raises the possibility that Riggio or another group could take the company private. Without Borders, the retail operations have reasonably good prospects for the short term. The company noted that sales of physical books rose for the first time in five years over the recent holidays and that comp sales through the trade stores were up 3.4%. The company expects the absence of Borders to add $200 million to $230 million in revenue this year. Comp sales through BN.com were up 52.0%, but the gain came entirely from the sale of devices and digital content as the sale of physical items declined.

Barnes & Noble Holiday Sales