Friday, January 5, 2018

Barnes & Noble (BKS)

I love books, and out of all the retailers out there in the past five, ten years, I've spent more time at BKS than anywhere else. It used to be Tower Records or J&R Music World, but now that they are all gone, BKS is one of the only other retailers that I actually enjoy being in (and, of course, some independent bookstores).

Bitcoint tangent
By the way, I don't care, really, either way about bitcoin, but did you guys notice something really interesting? The financial guys that really love bitcoin are some of the guys that either blew up or closed funds due to poor performance. The two most prominent fund manager bitcoin boosters are like that. It almost feels like they are so happy to have found their Hail Mary pass. And the most prominent guys that have good performance and didn't blow up tend to be the guys that don't like bitcoin and think it's stupid, a bubble or whatever.

Think about that for a second. Oh, and that former hedge fund guy, after bitcoin plunged put his new bitcoin hedge fund on hold (buying high and selling low?). Now wonder he didn't do well with his hedge fund; if you're going to be making decisions based on short term volatility like that, you are bound to get whipsawed and lose money.

This is interesting because we can never really understand and know everything. But it is useful to know who you can listen to and who you should ignore. Sometimes, this saves a lot of time!


Back to BKS
But what has been shocking to me, after having spent hours at BKS over the past few years, is how inefficiently run it seems to be. I am always surprised at how many employees there are walking around, or just standing there doing nothing at all. I'll call them floaters. Sometimes, desperate looking employees come up and ask me if I need any help as if they have to fill a quota on how many people they help.

Recently, even before the holiday rush, I saw two BKS employees leaning against the hand-railing playing with their phones. I went to look for some books, came back, and they were still there. Doing nothing at all; not even greeting.

And what about those 'greeters' at the top and bottom of those escalators? They remind me of the Japanese department stores in the 80's; those uniformed employees with handkerchiefs held against the escalator handrail, bowing to customers as they get on and off. Yes, BKS has the equivalent of that, in 2017!  Sometimes they stand so close to the escalator that it seems dangerous as it blocks people from getting off... I almost tripped when someone stopped right at the top of the escalator to ask a question. Last fall, I saw two people at the bottom of the escalator. Do we really need so many greeters? (and why are they all white?! Even in diverse Brooklyn, all of the employees are white, except for security guards and cleaning staff. Is BKS so old-fashioned to think that only white people have college degrees and are capable of working at BKS? This is 2017, not 1830. Come on!).

With 600+ stores, these greeters and floaters can be very costly. I can't imagine them making less than $15/hour. At 8 hours a day and 600 stores, one of those floaters (I call them that because they just float around doing nothing) can cost the chain $26 million/year. You get two of those, and that's $50 million/year.

To put this into context, the bookstore (excluding NOOK losses) had operating income of $91 million in 2017 (ended April 2017).

Of course, this may be a little too simple; not all stores will have elevator greeters etc., and operators will point to K-Mart/Sears as an example of what would happen if you cut too much in costs (and how financial people are clueless). But that's an extreme case, I think. It doesn't mean there isn't room for improvement at BKS. I know that they respect their 'booksellers' and want that community bookstore feeling with tons of friendly and knowledgeable employees to help people buy books. But it seems a little over the top and outdated to me. But I'm not a retailer so...

Technology
The other thing is that when you walk into a BKS, it's like walking into the 1970's; there is no technology anywhere. OK, there probably is in the POS system and in the back somewhere, distribution etc. But otherwise, the absolute lack of technology is kind of stunning.

Japan is not known for running efficient retailers (there are some good ones, like 7-11, Uniqlo, Muji etc.), but even in Japan there was this cool thing at a large bookstore:



It's a section where customers can search for things on their own. At BKS, when you ask someone anything, most of the time they go to a machine and do a search. I always wish they had one available for customers so we can do it ourselves. It would free up a lot in terms of labor.  Even the New York subways have huge touch-screens so you can find and get information.

Here's the other thing. I notice long BKS checkout lines and wonder why that hasn't been automated. I would think books, due to their relative uniformity, would be the easiest product to implement self-checkout.

And here's the embarrassing thing; even the public libraries have self-checkout now. I love the public libraries and don't mean to knock them, but you don't expect those quasi-governmental, non-profit organizations to be at the forefront of technology. Those self-checkouts are really great. I used to hate waiting in line to check out books at the libraries. Now it is very easy and fast. And self checkouts would mean noone trying to sell you anything! I used to always have this awkward conversation, saying no, I don't need a card, and no, I don't want you to have my email address or mailing address etc...

Also, most of the time when you see someone ask a BKS employee a question, it's "where are the cookbooks?" or some other thing. Any high school coding club could set up a touch screen floor-map of a store pretty easily. I always wondered why there isn't one of those set up by the front door, elevator and escalators. Technology is getting cheaper and cheaper. And BKS seems to be one of the best places to implement some of this stuff. They also have so much data that they would be able to use (just saving what is searched by customers would give a hint to buyers).

Pricing
The other issue is pricing. Even if you are a member and get a 10% discount, the prices on most books are still much higher than on Amazon if you are a prime member (and get free delivery). Amazon built their business on the Costco model, but BKS memberships seems like a half-hearted attempt at that. There doesn't seem to be a real economic benefit to being a BKS member (if AMZN books are still way cheaper than BKS member prices, why bother?!).

If they are going to do it, why not jack up the membership rates and lower member book prices? Why not match online prices like Best Buy? (isn't that how BBY recovered?).

Anyway, I don't know. It's really frustrating to watch this ice cube melt as I really do like BKS and don't want them to go under. But if they keep their head in the sand and try to keep up with this, they are not going to survive, and that would be a bummer for me (where would I hang out in a mall or when I have to wait for someone when they shop?!).

There are a bunch of other things, like, why is their CD/DVD section still so big, and prices so high? Do people actually buy things there? Every time I see those sections, I walk through it and I don't think I've ever seen anyone in there. I saw very few people in there during the holiday season, but usually it's empty or one or two people at most... What's up with that?

I know retailers are dangerous for private equity and activists, but it just seems like there is so much low-hanging fruit there that I can't imagine someone not making money off of gaining control.

Having said that, I don't own any (and have never owned) shares, yet. It is definitely a melting ice cube so I would be careful. But still...







34 comments:

  1. I know what you mean about the staffing inefficiency at BKS. I was in one the Friday night before Christmas. The check-out line was 8 deep, but only two cashiers were ringing up customers.

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  2. Booksellers are about the easiest thing to replace with online sales --- there's a reason Amazon started with books! I wonder what kind of profits Amazon is making on book sales; in addition to having less overhead, Amazon may also be quite happy to break even on book sales.

    Anyway, it's probably impossible for a physical retailer to compete with Amazon on selection, price, or convenience. So I would think a retail bookseller would want to offer services such as: cafe, book signings, book clubs, readings for kids, and so on. Large locations could hire a music student to play gentle guitar or piano melodies (a much better use of money than greeters). Well, these are the things I came up with off the top of my head... I would hope that a room full of highly paid executives could figure out more and better ideas!

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    1. Yeah, probably too hard over time. And they can't really just compete on price either. But the price difference is just too wide... If I can get a $50 book on AMZN for $30, as much as I want to support brick and morter and local employment, even w/ membership, if a book is going to cost me $45 at BKS, I can't do it. That's just too much and I spend way too much on books it's a big deal... They have their head in the sand pretending that friendly floaters/booksellers will get people to pay almost double for books... That's not a long term strategy...

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    2. Agree 100% and discuss this all the time with my friends. A fun game to play whenever in a BKS is guess the price gap with Amazon. It's truly remarkable, especially in the 'business' book section. It can be over 50%, sometimes even 80%! There is a small premium that I'll pay to walk out of the store with a book in hand (and support a place I like), but it's nowhere near the premium they charge. The prices often don't even compare to bn.com...perhaps it's the culture where they run their website as a separate operating unit instead of integrating the two.

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  3. Great post. Have the same thoughts every time I walk into a BKS, and I would hate to see them die. Love the BTC point too.
    Also, wish you would post more often. I check this site every day, hoping there's a new post. ��

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  4. They are the only bookstore I see around now. I am wondering if they go out of business then what will replace them? Public libraries? Or will amazon start creating more bookstores once all the inefficient competition is gone?

    Also agree with the other poster that you should post more:)

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  5. For a while I have thought they should go to a Costco/sam's type model with annual membership fees and sell the books at cost. So many people just go in there and hang around (or at least they used to) and don't buy anything. Physical retailers really need to step the fk up. If they want to compete, we should NEVER have to wait in line. Go full RFID and move all those resources for the checkout drones to train and equip high quality salespeople on the floor who can be objective as between products sold by the store and help inform about products more than reviews (which to my mind are becoming so 'gamed' they are bordering on useless for many products).

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  6. I actually used BKS as my Strategic Analysis (capping) for my MBA at the end of 2016. Interestingly, just about everything you mentioned was a big part of it. BKS is really bad at technology. They should have dumped NOOK a LONG time ago, after years of it being under restructuring and trying to get it to work, even getting a third party to run most of it its just not something that works. The sad thing is that its a very profitable company without NOOK.

    Funny enough Borders even had do it yourself search for book computers that could help you find if they had the book somewhere in the store, at a nearby store, or online to be ordered for pickup. As i said, BKS is BAD at technology.

    It really is fascinating how a company that used to be the leader in its industry at this point has a lot of options for staying relevant/profitable but just doesnt act on them despite how obvious they are and essentially lets amazon walk on top of them.

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  7. I have noticed many of the same things at BKS, and I wonder if BKS benefits from being among the last of the big brick and mortar booksellers. I will also note that the long checkout time is pretty common at all the local bookstores, chain or not, and I admit I really don't understand why. As a prime member I use Amazon to get used versions of classic books I want to study, or the latest from authors I follow. However, I like to browse for new books, and I like physical copies of books, so I continue to visit BKS (and other bookstores, but BKS is probably 2/3 of my brick and mortar time). I even have a membership - and I'm not a joiner, but it made sense at the time.

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  8. Looks like a prime candidate when looking for a company to short...

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  9. Last night I was at the Apple Genius Bar and overheard a conversation between an Apple employee and customer about cryptos. The Apple employee had all sorts of advice and even mentioned a coin (Tron) that is supposed to get huge in the next two weeks. Just thought I would share because it reminded me of the 1929 shoeshine boy story. Interesting times we live in.

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  10. Tech is not used properly in retail at all. Your post made me think about women's retailers and I think some of them would benefit with an in house tablet type device that could take their measurements and then visually on the tablet show suggested outfits by that particular retailer. You need to get the fashion right of course but in many cases that modest value add could lead to a much larger attachment rate in terms of accessories, etc.

    Retailers are by and large idiots, they try to compete w/AMZN on cost, so u go into a store like M for one purchase, it's empty yet a long line of 4-5 people to buy something cause M cant have too many employees on the floor, all the reminder you need to not go back unless absolutely desperate.

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  11. Great post. I sometimes wonder just how crowded the long Amazon short retail trade must be in the business. It's just hard to bet against Bezos, who has a unique ability to not snob his nose at fringe ideas that have tremendous upside (for his customers' benefit) and he's experimenting all the time. It's just harder for retail to do same. I prefer to wring out retail's upside story from "undervalued" mall reits.

    Speaking of not ignoring powerful tech forces, I think one of the investors you're referring to is Bill Miller. His digital currency position went from 5 to 50% of assets. Look, i'll eat crow if he actually predicted that outcome, but assume you bought into the power of distributed trust systems (incidentally, Berkshire Hathaway's structure has been said to be based on a circle of "deserved" trust), then you might have taken a position on some estimation of odds (since probabilities can't fall very far below 0 -- in fact they can't -- any delta in true chances of adoption would make MILLER look like a genius). It's an intelligent speculation and one that he's admitted to be finding ways to trim significantly. So, I don't think we're being fair to Miller. Maybe the other guy, yeah.

    One last point. The argument that all blockchain investors have blown up.... I used to assume that. Until 2 guys that I have lots of respect for, Glenn Hutchins (co-founder of Silver Lake Partners) and Lawrency Summers (ferociously smart economist), provided their views at a Brookings event. I think the value tent can accommodate less dismissal of the subject at this point, but I may be wrong.

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    Replies
    1. Good and fair points, but I personally wouldn't invest with someone who bought into bitcoin. There were a lot of people that made tons of money during the internet bubble too, and they looked really smart. Some of them stayed rich. But I would not invest with them either.

      As for investing in businesses around it, that's a little bit different, like selling shovels to gold miners. And I do think of bitcoin as a currency and blockchain technology differently.

      Anyway, this is all really interesting, but I don't think value people have to do anything. A new, interesting asset class may arise, it may not. But I think value folks can do well with stocks, thank you very much!

      I think... who knows... We'll see. (but again, I don't really care. I have made my money with things I understand (even derivatives!) and am very comfortable with what I need to know before I buy into anything, and that hurdle is sometimes a little too high so I miss things but that's totally OK. I will miss this, and I will miss many, many other things too. But that's OK!

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  12. Notice Abrams has been selling shares of bks off as he still has over 6M shares. For as long as Amazon has been a competitor to BKS, it seems mind boggling that the executives have not pushed for some creative strategies that differentiate from an online bookseller.

    BKS is what Best Buy and Fry’s is to Amazon, a look-see place before purchasing online.

    I really do hope mom and pop and brick and mortar places survive, but hard to fathom with the overhead expenses of lease and competitive nature of online.

    People need to socialize and hang out. We will have less and less if most of these places shutter up.

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  20. Off topic, but I know you've analyzed banks in the past and have a lot of respect Jamie Dimon. Any thoughts on Barclays and Jes Staley (ex-JP Morgan)? It currently trades at 0.47x BV and CEO Staley worked in investment banking for decades, which is apparently the part of Barclays that needs fixing. Also, he hired many of Barclay's top execs away from JP Morgan.

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    Replies
    1. Hi, yeah, it's interesting. I don't own it, but Staley is very well-regarded. I heard that from someone who worked under him too. I just wonder how much he can actually get done. I think some thing in the UK are like Japan, so that's the only concern I would have.

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  21. I just stumbled upon this blog while researching for my own article on www.thestockdork.com. I have had similar thoughts on BKS but cant get myself to pull the trigger. With the markets collapsing before my eyes it may become even more of a value stock.

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  22. I just stumbled upon this blog while researching for my own article on www.thestockdork.com. I have had similar thoughts on BKS but cant get myself to pull the trigger. With the markets collapsing before my eyes it may become even more of a value stock.

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    1. No, I don't have any comments on that. There were some questions about it on L's recent earnings conference call, but Tisch said all the answers are in the filings so look there.

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