As investors took advantage of the shorter market hours ahead of the July Fourth holiday, bookseller Barnes & Noble (BKS) used the quieter trading day to unexpectedly announce the termination of its CEO, Demos Parneros. Interestingly, the company's statement didn't explain the reason why Parneros was being terminated, other than to say that the action did not involve any breach of "financial reporting, policies or practices or any potential fraud relating thereto" and came on advisement of its law firm. Parneros will not receive any severance and is no longer a board member.
This news is both surprising and ominous, and while we don't know exactly what happened, and we may never know, it doesn't change the fact that it has been a tough slog for Barnes & Noble over the past few years as consumers shift from traditional books to digital ones as part of an overall trend of an increased digital lifestyle.
Other signs of this shift have rewarded streaming music service companies such as Pandora (P) , Spotify (SPOT) and Apple (AAPL) (Apple Music) while hitting record companies on the sales line as CD sales took a dive. Last weekend, Best Buy (BBY) stopped selling music CDs and it's widely expected that Target (TGT) will soon follow suit. I must admit, I had no idea Target continued to sell music CDs.
Barnes & Noble stock has been on a downward slope since early 2006, despite several new strategic efforts, and unless the company can figure out a good digital strategy soon, its share price and dividend could be in further jeopardy.
B&N's latest quarterly results showed a 52% increase in per-share losses and more than a 4% drop in revenues vs. the year-ago period. Other negatives:
-- Book comps decreased 3.4% for the quarter, while non-book comps decreased 4.5% due to double-digit declines in the gift, music and DVD categories.
-- B&N ended the period with 630 bookstores vs. 705 at 2011's end. The company has beta-tested a new store format that includes an expanded cafe (with wine, beer and other beverages), but a firsthand look didn't assuage my fears that the redesign will do much to jump-start in-store book sales.
-- Comparable-store sales decreased 5.4% over the prior 12 months, while online sales fell 9.6%.
Now, one can understand declines at Barnes & Noble's bricks-and-mortar locations given the fact that retail traffic is stalling industrywide. But it's more troublesome to see the company's digital sales fall nearly 10% year over year at a time when revenues at Amazon (AMZN) or subscriber metrics at Netflix (NFLX) keep growing.
Or, considerThe New York Times Co. (NYT) which added 139,000 net digital subscriptions during its latest quarter. That brought its total digital-only subscriptions to 2.783 million, or roughly 75% of the Times' 3.7 million combined print and digital total.
At Barnes & Noble, digital struggles have combined with problems plaguing its bricks-and-mortar stores to hit the balance sheet with a real gut punch. The company had just $10.8 million in cash vs. $158.7 million in debt as of April 30 vs. $74 million in cash and zero debt at 2015's end.
And with B&N's quarterly loss growing to 29 cents per share in the latest quarter from 19 cents a year ago, confidence in the chain's ability to achieve bottom-line expectations is running rather low. While analysts' consensus estimates have Barnes & Noble achieving 59 cents of earnings per share over the next 12 months, that's a far cry from the $1.79 loss per share that it served up over the past year.
Of course, perhaps the biggest risk for income investors involves Barnes & Noble's 15-cent-per-share quarterly dividend. Maintaining that will cost the company roughly $43.6 million over the coming year even though B&N has just under $11 million in cash and a track record of negative free cash flow.
While Barnes & Noble can borrow further to cover the payout (it has some $591 million remaining on a $750 million line of credit), that's a low-quality way to fund a dividend. Should there be a cut to the dividend, a scenario that is likely, it could punish BKS shares even further.
Let's also remember that at some point a new CEO will be named, and odds are he or she will arrive with a bold, new strategy that will also include a clearing of the decks and resetting of guidance. Historically, that has led to share price pressure.
No matter how you slice it, it looks like more pain ahead for Barnes & Noble shares.
(A version of this article ran July 3 on TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Robert Powell, Peter Tchir, Chris Versace and others.)
