BKS Market Research & Analysis Report
Updated Apr 1, 2015

Growth and Balance Sheet

Barnes & Noble's fiscal third-quarter profit climbed thanks partly to some reduced expenses, but revenue fell as it dealt with weakness in the retail and Nook segments. Barnes & Noble earned $72.2 million, or 93 cents per share, for the period ended Jan. 31. A year earlier it earned $63.2 million, or 86 cents per share. The results did not meet Wall Street expectations. The average estimate was for earnings of $1.19 per share. Depreciation and amortization expense declined to $47.9 million from $54.4 million, while interest expense dropped to $3.6 million from $7.8 million. The New York company's revenue fell to $1.96 billion from $2 billion on softness in its retail and Nook segments. The retail segment includes Barnes & Noble bookstores and BN.com. The Nook segment includes digital content, devices and accessories. Revenue for the college segment increased 7.2 percent. Last month Barnes & Noble announced that it is keeping its Nook Media digital business. The company had planned to combine Nook and its college bookstores into a single company separate from its retail operations. It has now decided to keep Nook and the retail operations together. It will still spin off its college bookstores. Barnes & Noble forecast retail sales to drop in the low single digits for the year, with core comparable sales expected to be flat.

Valuation

BKS PE is not meaningful due to negative earnings. BKS forward PE stands at 43.98 above the industry average of 23.46, and above the S&P 500 average of 17.83. The company is currently trading above the preferable P/E ratio of 15x. BKS current Price/Sales of 0.24 is below the average of its industry, of 1.18.  The beta of 2.17 implies higher volatility of the stock with respect to the S&P 500. BKS has shown negative earnings consistency over the last five years. The current quarter earnings in comparison to the same quarter last year have decreased by 1.27% which is below the required level of 15%.  BKS’s head to head comparison to its main competitor shows that the company has a gross margin below the average of its main peers, and one that is below the industry average. The operating margin is below the average of the selected peers and the industry. BKS’s twelve trailing months EBITDA is $338.34 million, above the industry average. The company has a total debt to equity ratio of zero. BKS’s current price levels are at the preferable level and are 9.42% below the 52 week high of $26.22, and the technical indicators are neutral. The majority of analyst ratings are hold. The company does not pay any dividend.

About BKS

Barnes & Noble, Inc. (Barnes & Noble) is a bookseller. The Company is a content, commerce and technology company that provides customers access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of April 27, 2013, it operated 1,361 bookstores in 50 states, 686 bookstores on college campuses, and operates one of the Web eCommerce sites, and develops digital content products and software. Barnes & Noble operates in three segments: B&N Retail, B&N College and NOOK. The Company's principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children's books, eBooks and other digital content, NOOK and related accessories, bargain books, magazines, gifts, cafe products and services, educational toys & games, music and movies direct to customers through its bookstores or on barnesandnoble.com.

Competitor Comparison

Barnes & Noble, Inc. (NYSE:BKS) N.V.

Highlights

Barnes & Noble operates in three segments: B&N Retail, B&N College and NOOK.

·   B&N Retail: The B&N Retail segment operated 661 bookstores as of May 3, 2014 under the Barnes & Noble Booksellers trade name. As of May 3, 2014, the Company’s B&N Retail segment purchases physical books on a regular basis from over 730 publishers and over 50 wholesalers or distributors. As of May 3, 2014, Barnes & Noble had stores in 161 of the total 210 Designated Market Area markets. The Company competes with Books-A-Million, Amazon.com, Apple, Costco, Target and Wal-Mart.

·   B&N College: As of May 3, 2014, B&N College operated 700 stores nationwide. As of May 3, 2014, B&N College operated 664 traditional college bookstores and 36 academic superstores. B&N College’s three customer constituencies are students, faculty members and campus administrators. The Company competes with Follett Corporation, Nebraska Book Company, Apple, Google, Amazon.com and Chegg.com.

·   NOOK: The Company’s third-party retail partners include Wal-Mart, Target, Books-A-Million, Fry’s Electronics, MicroCenter, QVC and HSN retailers. The Company competes with Apple and Amazon.com.

The stock closed yesterday’s trading session at $23.75. In the past year, the stock has hit a 52-week low of $15.45 and 52-week high of $26.22. IBM has a market cap of $1.52 billion and is part of the services sector.

• Strong presence in the e-content market
• Largest chain of bookstores in US
• Discount pricing to attract price sensitive customers
• Broad product portfolio   

• Involvement in several legal proceedings    
• Dependence on few suppliers  
• Significant and continued investment in digital business drains cash
• Significant costs associated with mainatining physical store locations

BKS Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. BKS's 52 week high is $26.22 and its current price is $23.75, is 9.42% below 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current P/E or the P/E using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a forward P/E ratio of 43.98 above the average industry P/E ratio of 23.46 and is above the S&P 500 P/E ratio of 17.83.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 34.32% of BKS stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

BKS is trading in the range of $22.30 - $26.22 in the past 30 days. The stock has been showing support at $22.40 and resistance in the $24.30 range. The stock is trading below the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is 51.22. Our indicators give a neutral view on BKS.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 0 Buy, 1 Outperform, 2 Hold, 1 Underperform and 0 Sell.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. BKS’s annual EPS for the last 5 years were 0.63, -1.22, -1.34, -3.02, -1.12, this type of earnings action is negative.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. BKS’s have total debt/equity ratio of 0.00% which is exceptional.

The EPS growth for this quarter relative to the same quarter a year is below the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. BKS’s EPS growth for this quarter relative to the same quarter a year earlier is --1.27%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. BKS’s annual earnings growth rate over the past five years is not meaningful.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.