Investing Blog

Brick and mortar retail is dying faster than I could ever imagine. As consumers shift toward cheaper online and digital options, and time preference during recession skews toward a longer wait, now more than ever, brick and mortar stores are on the brink. This time, though, the brand in question is oddly profitable, and for sale.

Barnes and Nobel

The largest book store in the United States (still worth less than a billion dollars at today’s market price) is up for sale. The company is seeking a buyer, and I would too, considering the onslaught that is sure to come to any business selling a product via brick and mortar that is as easily shipped as a book. The company currently trades at a Price to Earnings ratio of 20, a terrible deal for all parties involved. (Do you really think the offline retailing business will last for 20 more years?)

Even worse than the business model of retail book stores is Barnes and Nobel’s balance sheet. Currently, liabilities outpace assets compared to a $900 million in surplus of assets over liabilities just one year ago. Keep in mind the real difference is even larger, since “intangible” (worthless, unless this is the trademark/patents on the Nook, an ebook reader that is already outdated) assets rose some $500 million in one year.

Oh, and don’t forget its terrible PEG ratio of 35. This company has no room for growth other than the bottom line.

Why Barnes is Up For Sale

Clearly, this company isn’t worth buying. The opportunity for growth only comes from getting smaller, it has a sky-high price to earnings ratio, and the business as a whole is damn near dead. I’d buy it at a Price to Earnings of 5, because frankly, I think that’s all any buyer will get out of it.

At the current price, though, I’d be shorting the living daylights out of it with longer-term options plays. The problem with that, though, is that there are far too many people with not even brain cells who could presumably purchase this company at market price, maybe even a premium.

This kind of “buy us please” move by Barnes is nothing more than a way to lock in the current price of the stock and keep short-sellers away. We all know B&M retailing is just about as dead as the literacy rates in this country. This company is screwed. But because of the possibility that some gambler may buy the biggest book retailer in the nation, there is no reason to short it. If a buyout is announced tomorrow, the shorts will get whacked, even if the company only further goes into decline. Of course, you could then just short the purchaser, but who is to know how badly Barnes will drain their own profits and margins.

Investing