What's Barnes & Noble's next chapter?
The story of Barnes & Noble (BKS) appears to be getting better. But plenty of plot twists are yet to come for the largest bricks-and-mortar book retailer as it battles larger rival Amazon (AMZN) for the hearts, minds and wallets of readers.
Wall Street is betting on better times for Barnes & Noble, whose shares have plunged about 61 percent over the past year. The stock bucked Monday's sell-off, rising more than 5 percent to $9.18 in 2016's first day of trading. And analysts have an average 52-week price target of $17.50 on the stock, almost double its current value.
Heading into Black Friday, the chain's comparable-store sales, a key retail metric measuring sales at locations open a year or more, rose 1.1 percent. When the company reports December sales Thursday, it will also see a gain, according to Gabelli & Co. analyst John Tinker.
Barnes & Noble plans to close 10 stores in fiscal 2016, three less than it had originally forecast as promotions such as selling books signed by authors have boosted traffic to its stores. Tinker, who rates the stock as a "buy," argues that the chain's forecast is conservative and that it might shutter only seven locations.
Barnes & Noble, which recently spun off its college bookstore division, denied a claim made by the blog Good e-Rreader that it plans to close 197 stores by 2022. In an email, Good e-Reader editor Michael Kozlowski stood by the story.
The good news even extends to B&N's Nook e-reader business, which has long been a weakling struggling against Amazon's mighty Kindle. The division ended last year with a loss, excluding one-time items, of $39 million.
Even though that's an improvement, CEO Ronald Boire called the level of red ink "clearly unacceptable" during last month's earnings conference call. He added that the chain is "looking for material improvement in the Nook operating costs going forward."
Barnes & Noble bought out Microsoft's (MSFT) share of a partnership to develop the e-reader for about $125 million in December 2014, two years after the software giant invested $300 million. The retailer also acquired U.K.-based Pearson's stake in the venture for $28 million, less than its original $89.5 million investment.
"We have a very, very complicated situation," said Tinker, whose firm owns Barnes & Noble stock.
To be sure, Amazon remains a formidable and much larger competitor with a market value around $320 billion. Barnes & Noble, which has 647 locations, is valued at about $700 million. The smaller company provides customers the opportunity for "discovery" while browsing through its shelves, according to Tinker. "But Amazon is great if you know what you want to buy," he added.
Barnes & Noble has taken longer than expected to improve its e-commerce operations, and it faces a huge challenge in taking on Amazon. It also can't just quit the money-losing Nook because the e-reader's few fans are also heavy book readers.
"You cannot just walk away from them," said Tinker. He thinks Barnes & Noble may benefit from the introduction of smaller format stores later this year, a strategy other retailers are doing.
"Their biggest problem obviously is that their stores are very big," he said. "Their average size is about 26,000 square feet. So, how do you have a store that offers tremendous choices of books yet isn't too large?"
Barnes & Noble spokeswoman Mary Ellen Keating declined to comment on the company's plans, which have been announced previously.