Operating 640 stores around the country, Barnes & Noble (ticker: BKS) has positioned itself as a destination for book lovers and families who enjoy browsing in its stores, and yes, buying books, even though Amazon’s prices often are lower. Barnes & Noble has successfully diversified and now gets a third of its sales from nonbook products, including music, toys, gifts, magazines, and cafes.
Barnes & Noble shares look inexpensive at about $11.50, with the discounted price reflecting Wall Street’s worries about its long-term viability. It has one of the cheapest valuations in the retail sector with a price/sales ratio (enterprise value divided by sales) of 0.2, and an enterprise value/ annual cash flow multiple of under four.
Even challenged retailers like Best Buy(BBY), Bed Bath & Beyond (BBBY), and Staples (SPLS) have higher valuations, with Best Buy and Staples trading for close to 0.3 times sales and 4.5 times cash flow. Enterprise value is defined as market value plus net debt. Annual cash flow is earnings before interest, taxes, depreciation, and amortization.
Barnes & Noble pays a 5.3% dividend—60 cents a share—that looks secure based on estimated free cash flow of about $1 a share in the current fiscal year, ending in April. “The dividend looks rock solid to me. It was only instituted a year ago. It’s not like the company is clinging to a legacy dividend that it’s struggling to pay,” says Alex Fuhrman, an analyst at Craig-Hallum who has a Buy rating and a price target of $17. “Fears of Amazon driving it out of business are overdone.”
With a market value of just $840 million and less than $40 million of net debt, Barnes & Noble could become an acquisition candidate for private equity or even a strategic buyer like Starbucks (SBUX). And if no deal materializes, its strong balance sheet and cash flow give it staying power.
After keeping a low profile in recent years, Barnes & Noble held an investor day in June during which it laid out its strategic and financial goals. It projects Ebitda of $200 million to $250 million in the current fiscal year, rising to a range of $270 million to $310 million by the year ending in April 2020. It aims to achieve that goal by further reducing losses at its Nook e-reader business, expanding online and bookstore sales, and reducing expenses. Fuhrman thinks the financial targets are achievable.
Among the things that Barnes & Noble revealed in June was that it has six million members who pay $25 annually for various benefits, such as 40% off on hardcover best sellers. That membership base has increased in recent years and has a retention rate of over 70%. Other positives are that e-books have plateaued at just 15% of the market. Enlarge ImageThe company’s revenues last year were $4 billion, down 1.9% from the prior year. Comparable-store sales were flat, a decent showing given the Amazon presence and tough times for traditional retailers. The company projects roughly flat comparable-store sales in the current year. It will report fiscal first-quarter results on Thursday.
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