Barnes & Noble: Certain stocks  are cheap for a reason

Barnes & Noble: Certain stocks  are cheap for a reason

Over the last few weeks, we’ve been kicking the tires on several new positions for the Tematica Research Select List and recently added both United Rental (URI) and Vulcan Materials (VMC) to the Contender List. While it’s always exciting to add new positions, we have to remember that even with a stock market that is melting up like the one we are currently seeing, we still need to understand the business dynamics at play for the company behind the shares. Are we seeing thematic tailwinds or headwinds, and are there any catalysts to be had that will alter the winds that are blowing or intensify the force of those winds?

A great example can be found in book and gift retailer Barnes & Noble (BKS), which is attempting to pivot its business model headwind with a new line of stores that have an expanded café as it faces the realities of today’s online world, what we call our Connected Society investment theme. The gist of these new stores is the café will draw people in, but the crux of the issue is will it get people to shop for something more than a cup of coffee or a convenient snack?

Whenever possible, I find a boots on the ground approach, roll up your sleeves and check it out approach is called for. And that’s exactly what I did.

The new Barnes & Noble stores are an interesting concept and I’ve visited one of the few locations that is open in the Washington, DC metro area. It’s a wide-open space, the food is good and the menu includes a variety of soft and adult beverages. For mobile workers looking for a place to hole up, this will give Starbucks (SBUX), Panera Bread (PNRA) and others like them a run for their money.

Back to the question from above —  is sitting in the café likely to alter the changing behavior that is buying books and other things online?

I can say that I, and a score of others, were showrooming the newer books and truth be told I even hunted around for a few copies of the book I co-wrote with Tematica’s Chief Macro Strategist Lenore Hawkins – Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals. For those looking for a copy, I’d recommend buying it online as you’ll get a far better price. No surprise, as that is one of the reasons consumers are flocking to digital commerce — the ability to easily price compare and stretch those disposable spending dollars.

Back to my Barnes & Noble visit . . . did the vast majority of people buy books, that is plunk down cash, card or even smartphone and buy a book or two, a calendar, or some other gift idea?

During the several times I have been there, both during the 2017 holiday shopping season and after, the overwhelming answer was “no.”

And then there was the other shoe to drop.

Barnes & Noble recently shared its holiday sales for the nine-week holiday period ending December 30, 2017, and it was not good. Not good at all. In fact, it was just painful and rather revealing. Year over year for the period, total sales were $953 million, declining 6.4%, and comparable store sales also declined 6.4% for the holiday period. Now, this next piece of data is particularly revealing – during the holiday period, Barnes & Noble’s online sales declined 4.5% year over year.

We all know that brick & mortar retail is having a challenging time as it squares off against Select List holding Amazon (AMZN) ups the ante, and Walmart (WMT) is pulling out the stops – acquisitions, repositioning Sam’s Clubs into distribution centers, and new digital offerings – to compete. But Barnes & Noble is seeing its online business contract at a time when consumers are increasingly shifting their buying preference to this modality. We saw this in spades this holiday shopping season and in the December Retail Sales report released on Friday that showed Non-store retail sales rose 12.7% year over year and 11.0% for the last three months of the year vs. the same period in 2016. For context during those two periods, retail sales rose 5.6% and 5.9% year over year, respectively.

From my eyes, it sure seems Barnes & Noble is fighting the same headwinds it has been over the last few years, and at least thus far, it’s strategies to right itself have not been paying off.

Now let’s add some perspective, for the company’s last three quarters it generated bottom line losses and for what should be its seasonally strongest quarter it’s business contracted, both in-store and online. Making matters even worse, the last two reported quarters missed expectations by a decent margin. Put it all together, and it says the company’s business continues to, put it politely, be challenged and there is not a lot of confidence to be had right now in the management team.

This is a reason to pass on BKS shares. Plain and simple. No matter how tempting they might look.

Some investors may be tempted by the current dividend yield that clocks in at more than 11%. That’s a heady dividend yield and one that is bound to catch eyes, but again let’s remember that recent string of bottom line losses and the fact the company’s current quarterly dividend runs just shy of $11 million per quarter vs. the $11.3 million in cash it had on its books exiting October. The issue may not be with the current dividend, but if the headwinds plaguing the company continue, odds are people will begin to question the company’s ability to maintain the current quarterly dividend of $0.15 per share without dipping into other borrowings on its balance sheet.

I’d rather stick with our Amazon shares and the Costco Wholesale (COST) shares on the Select List, especially as Costco continues to deliver robust same-store sales growth figures each month.

  • Our price target on Amazon (AMZN) shares remains $1,400
  • Our price target on Costco Wholesale (COST) shares remains $200
GameStop – The Next Expected Victim in the Shift to Digital Downloads

GameStop – The Next Expected Victim in the Shift to Digital Downloads

Much like music, TV and movies, gaming has finally felt the pinch of the shifting preference by consumers (gamers in this case) for digital downloads over the physical cartridges of yesteryear and DVDs. We suspect mobile gaming on smartphones and the ability to download a game as well as play it where/when one wants it also a factor. The looming concern is what will drive traffic into GameStop locations as the digital download preference hits the tipping point? Maybe they’ll become like Barnes & Noble and sell everything, but games near the checkout counter.

GameStop forecast a bigger-than-expected drop in same-store sales for the crucial holiday quarter, and the company said it expected revenue from its business of selling videogames to largely decline during the period. The company, the world’s largest retailer of video games, has been struggling as more players switch to downloading games on their consoles from buying physical copies.

Revenue from the videogame category, which includes new hardware, software and accessories, is expected to decline in double digits in November and by single digits in December, Chief Operating Officer Tony Bartel said in an interview on Tuesday.

Source: GameStop forecasts bigger-than-expected drop in same-store holiday sales | GamesBeat | Games | by Reuters