As Barnes & Noble, Inc. (NYSE:BKS) prepares to report its first-quarter earnings on Tuesday, the company’s stock has taken a hit, after Microsoft Corporation (NASDAQ:MSFT) announced its April 30 announcement to purchase a stake in the company and add an infusion to expand its electronic books.
While jumping 52 percent on that ill-fated day, the honeymoon may be over for this marriage, as Barnes & Noble’s shares have tanked 41 percent since the April announcement, according to Bloomberg. With another loss projected, declining sales of print books, slowing Nook -e reader, and tablet revenue growth and increasing competition from Apple Inc. (NASDAQ:AAPL)’s upcoming iPad version, this company has its challenges.
Not helping matters is the vagueness in the partnership between Microsoft Corporation (NASDAQ:MSFT) and Barnes & Noble, Inc. (NYSE:BKS), regarding their plans to change things. Peter Wahlstrom, a Morningstar Inc. analyst, recently said via Bloomberg, that Barnes & Noble must “prove they can make this into a viable model and they haven’t done that yet.” As for Microsoft’s involvement, it “doesn’t fix it.”
Analysts have forecast that Barnes & Noble will report a 4.3% revenue increase to $1.48 billion, on a larger net loss of $1 per share, as compared to last year’s 94 cents per share loss on Tuesday.
But what has Barnes & Noble recently tried to do to improve its financial state?
After releasing its 2010 Nook Color–its first tablet–it grabbed market share as an alternative to Apple’s iPad, thanks to its price and the fact the company converted store sections into Nook showrooms to sell its e-readers and tablets.
Soon, the competition started to arrive. First there was Amazon.com Inc.’s (NASDAQ:AMZN) Kindle Fire, with its similar price point last winter, followed more recently by Google Inc (NASDAQ:GOOG)’s Nexus 7. Apple Inc. (NASDAQ:AAPL) is expected to join these other mini-tablets in October.
And more recently, the company slashed prices last week on its Google Inc (NASDAQ:GOOG) Nook Color and Tablet to $179 for the 8-gigabyte tablet; the Fire, while the Nexus 7 sells at $199.
There’s also the attempts by the bookseller to keep its share of the U.S. e-book market. It’s at 25 percent, and has been easy to do so, as content sales, which includes digital books and apps such as Angry Birds, have more than doubled to $483 million in the last year, as compared to store and website sales declining 1.5 percent to $4.85 billion.
According to Bloomberg, content also produces a gross margin higher than 30 percent, as compared to the company’s 27 percent margin.
And similar to Amazon.com, Inc. (NASDAQ:AMZN), Barnes & Noble either sells its e-readers and tablets at a loss or break-even to keep customers in their system. This has been called “digital lockers”, and there’s a school of thought that once consumers start buying e-books on the Nook, it will continue. Amazon.com, Inc. (NASDAQ:AMZN) has done this with their Kindle, and Barnes & Noble looks to do the same.
David Schick, a Stiflel Nicolaus analyst, said via Bloomberg, “The idea is not to get every human being to have a Nook device. It’s to get people who read a lot to be on their platform.”
He has a “Hold” rating on the stock.
The question now, is what happens when Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 begins powering Barnes & Noble’s tablets? Will this incite loyalty from Nook customers, while gaining new ones thanks to a broader reach; it will be available on 122 million devices, with tablets numbering 6.7 million by the end of next year. Look for an international expansion as well.
The deal is expected to close by year’s end.
But in the shorter-term, is it possible that Barnes & Noble could face bankruptcy? In the last five years, its stock is down 65 percent. Are they too late to the tablet party,, as some customers exited and went to Amazon.com, Inc. (NASDAQ:AMZN)’s Fire, and soon, Apple’s new mini?
According to Bloomberg, with Microsoft’s 18 percent stake in the Nook subsidiary, this gives the company $300 million in cash. The software giant has also said that it will infuse an additional $305 million over five years on revenue sharing and capital expenditure payments.
Don’t write off Barnes & Noble, Inc. yet. Perhaps Tuesday’s earnings conference call will provide some clues.