With Barnes & Noble announcing that it is considering strategic alternatives, including a sale of the company, retail property owners have to be wondering if they are in for another round of big-box closures.
The chain is the leading brick-and-mortar bookseller in the country—a business that has come under strain because of a decline in discretionary spending, intense competition from Amazon.com and the increasing popularity of e-readers.
Barnes & Noble’s management has kept up with changing market conditions by putting more emphasis on its online division and coming out with its own e-reader, among other initiatives. Industry insiders wonder, however, if Barnes & Noble might have to slim down its base of 1,300 stores as a result of the changing book market. The consensus is that while the retailer will likely tweak its portfolio, it is unlikely to undertake massive store closings.
“The book business is challenging, but of the [players] out there, Barnes & Noble is probably the best positioned,” says Ivan L. Friedman, president and CEO of RCS Real Estate Advisors, a New York City-based retail real estate consulting firm. “I think there could be selective closings for both Barnes & Noble and Borders, but nothing like what happened with Circuit City and Linens ‘n Things.”
There is no question that Barnes & Noble has been affected by the recession. The company reported a 3.1 percent decline in same-store sales at its 720 regular stores for the fourth quarter of fiscal 2010, ended May 1. Same-store sales at its 637 college bookstores increased 2.9 percent. During the same period, the company’s online sales increased 51 percent. Online sales currently make up about 10 percent of the retailer’s total sales. Barnes & Noble projects that in fiscal 2011 its brick-and-mortar same-store sales will likely range between flat and an increase of 3 percent. Its online sales will likely rise 75 percent, to $1 billion.
The company’s stock has taken a beating recently. At the close of the trading day on Aug. 2, right before Barnes & Noble announced it was seeking strategic alternatives, its shares traded at $12.84 apiece. Its 52-week high is $28.78 per share.
There are several reasons experts think going private might be the best option for the firm. It would enable Barnes & Noble to right-size its store portfolio and develop its digital business without having to worry about Wall Street’s frowning upon the capital expenditures, writes Morningstar analyst Peter Wahlstrom. In addition, the transition would eliminate the need to pay shareholder dividends, giving Barnes & Noble $55 million in extra cash on an annual basis. (Of course, if Barnes & Noble is acquired, it will likely have to pay some form of dividend to its new owners.)
The question is whether it can attract a deep-pocketed buyer and what the company’s strategy might going forward. One encouraging sign is that Barnes & Noble founder Leonard Riggio has expressed a desire to acquire the chain in partnership with a private investor group, says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. Riggio already owns 30 percent of the bookseller’s outstanding shares.
“Private equity wants somebody to bet their money with them and Riggio’s money will be in it,” says Davidowitz.
Another shareholder, Yucaipa Cos. founder Ron Burkle, also appears keen on buying the firm, although industry insiders say Barnes & Noble’s decision to put itself on the market has a lot to do with its desire to get rid of Burkle rather than sell to him. Earlier this year, the company enacted a “poison pill” measure to prevent Burkle from buying more than 20 percent of its stock. The case is now in court.
Barnes & Noble has also made strides in trying to increase its share of digital book sales. In the past year, it appointed its top digital expert William Lynch as CEO and launched its own e-reader, the Nook. The moves show that the chain’s management is able to keep up with the changing times, according to Wahlstrom.
Perhaps most importantly, retail consultants feel that physical books resonate with many consumers in a way CDs and DVDs never did. And Barnes & Noble offers a rich in store experience with cafes and events such as public readings and book signings.
“I do think it makes sense to shrink the [store] fleet,” says Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail consulting firm. “But there is always going to be a role and a place for bookstores. Nobody particularly enjoyed having a proper CD, whereas there is a value in having a physical book. Some people simply prefer them.”
All of these factors make it likely Barnes & Noble will attract a private equity suitor. But that will take time and if the new owners will decide to close stores, those announcements will likely come sometime next year. Johnson notes that given current market conditions, it might make sense for Barnes & Noble to close anywhere between 10 percent and 15 percent of its stores. And any closures could hurt some centers by not only increasing vacancies but also potentially by triggering co-tenancy clauses.
The good news is that the company has a very attractive real estate portfolio, with most of its locations in well-leased, well-performing centers, says Friedman. The majority of Barnes & Noble stores are leased, with 10- to 15-year terms. They average 26,000 square feet in size.
Of course, if Barnes & Noble ends up closing stores, it will likely get rid of its worst, rather than its best, locations.
“The liquidations of Circuit City and Linens ‘n Things brought a lot of attractive real estate to the market, so large box users were able to be opportunistic,” says Alvin Williams, principal with Excess Space Retail Services Inc., a Huntington Beach, Calif.-based real estate disposition and lease restructuring firm. “When a retailer is doing more conventional house cleaning, they get rid of the bottom 5 or 10 percent of their stores, and those stores typically have [real estate]challenges. With A-plus space, there is always a market for that. The B, C and D locations is where the headache lies for landlords.”
As of second quarter of 2010, there were 17.8 million square feet of vacant big box space on the market in the U.S., according to the CoStar Group, a Bethesda, Md.-based research firm. The figure represents a national vacancy rate of 11.1 percent, an increase of 20 basis points from the second quarter of 2009. Net absorption was a negative 257,735 square feet.