Over the course of the weekend, I visited several retail establishments. I am told that it was very pleasurable, although it really just felt like running errands. All in all, I would have preferred to be on the couch watching football, but, alas, this was not meant to be. While shopping, I noticed that the vast majority of retail establishments were preparing for Christmas. K-mart (SHLD) has been ready for weeks with about 25% of the store's floor space allocated to toys and Christmas decorations. Retailers hope to have a big Christmas season to give a strong finish to what has been a lackluster year, so far. I hope they get this. However, I miss the days when Christmas decorations didn't appear in stores until Thanksgiving.
As we checked out at K-mart, I recognized the clerk from having waited on me before at Borders in the Annapolis Mall for the better part of a decade before the chain went out of business. We chatted about what went wrong at the store and the future of the book industry. She believes that the pendulum will now swing back to the mom-and-pop book stores that dominated the industry before the big-box book retailers pushed them out of business. I suspect she is right, as the mass market industry will continue to trend toward e-Readers. But, in my opinion, a market for regular old, bound books will always exist.
The future for the remaining large bookstore chains is somewhat murky. Barnes & Noble (BKS) is a company that I have said for some time needs to be a private company. I think it missed its chance by not jumping at the $17 a share offer by John Malone earlier this year. The capital infusion of $202 million from Malone's Liberty Media would have helped, but the company would be better served as part of a media conglomerate or private equity ownership, in my opinion.
The last few years have been so difficult that the retailer's CFO just resigned citing exhaustion. I believe Barnes & Noble needs to scale back its retail bookstores and focus on college book stores and online sales. The 26,000 average square footage location size is a huge expense, and the company would benefit more with smaller locations that emphasize their NOOK e-reader and specialty publication. A long-term survival strategy would be much easier to develop away from Wall Street's quarterly spotlight.
The future of Barnes & Noble is the NOOK. We at Chez Melvin were late converts to e-Readers, but we currently own two color NOOKs and an Amazon (AMZN) Kindle. The Kindle is mine, and I am satisfied with the device, and the lower cost of e-books saves me a fortune. However, my wife and daughter love the NOOK and think it is far superior for the more casual reader. Comparing them side by side I agree.
I think the company has been very smart about allowing other retailers to sell the device. RadioShack (RSH) is the latest large chain to stock the NOOK, joining others such as, Best Buy (BBY) and Wal-Mart (WMT). The NOOK library is also available on a wide range of platforms, including smart phones and tablets, including the Apple (AAPL) iPhone and iPad.
Barnes & Noble needs to be bought out, and I believe it will be. The way to play this stock is with a long-term stock and options combo in my opinion. I would want to work the trade a bit by buying stock and selling puts during market weakness and selling calls on rallies. Even if you put the trade on right now, you would have a pretty good combo trade.
With the stock around $12, you could sell the January 2013 $17.50 call and $7.50 put for $2.50 or more if you work the sizable bid ask spreads. If the stock was put to you at $7.50, your second purchase of the stock would cost a net of $5 and a total cost of $8.50 for the combined buys. If the stock is above $17.50, you make $.8.00. In the unlikely event that the stock trades between $7.50 and $17.50 14 months from now, you keep the premiums and still own the stock at a net cost of $9.50.
A private equity or conglomerate buyer focused on the college book stores, e-readers and e-commerce parts of Barnes and Noble would have a valuable company that throws off a lot of cash flow. I think someone will eventually buy the company and begin the transformation process away from the short-term glare of Wall Street.