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February 25, 2013

Barnes & Noble's Brick and Mortar May Stay Open

By Steve Anderson, Contributing TMCnet Writer

With brick and mortar stores beset on all sides these days by a combination of factors – from online shopping to the rise of mobile shopping to increased gas prices to a weak overall economy – it's sad, but never very surprising, to hear about stores closing.

But the ones staying open are a different matter, particularly what we just heard from Barnes & Noble Chairman Leonard Riggio, who told the bookseller's board that he was out to buy the company's retail assets.

Riggio, according to his remarks, planned to buy not only Barnes & Noble Booksellers Inc., but also, meaning about the only thing he wasn't interested in taking on was Nook Media. The remarks sent Barnes & Noble's stock rising – at one point before the opening bell the stock had risen fully 26 percent, but left plenty of questions in its wake.

Perhaps one of the biggest issues is why Riggio would be interested in buying a business that's so clearly in decline. With the holiday shopping season only recently over at Barnes & Noble, the company has just seen a 10.9-percent drop in its sales – even on its websites – marking a downright unusual drop.

But there's a larger trend at work here that may make Barnes & Noble's retail operations unexpectedly more attractive, and that's the rise of the digital format.

By way of background, back in January of 2012, Barnes & Noble had expressed interest in taking its Nook business and spinning it all off. In October 2012, Barnes & Noble followed up on that interest by creating Nook Media, with content specifically geared for Nook and a focus on the college bookstore market.

That particular market – college books and Nook products – gave Barnes & Noble about 50 percent of its $1.88 billion in sales for Barnes & Noble's second quarter.

So why would Riggio be interested in the other half of the business? Peter Wahlstrom of Morningstar had some suggestions: the brick and mortar side was slow-growing but also self-sustaining, needing no capital to keep it going. Plus, the Nook had something of a disappointing holiday season on its side, which raises some questions about its overall value.

These questions only get more pronounced in an environment in which tablets are increasingly able to function as e-readers, and cheap, smaller tablets are gaining all the same.

Given that Riggio already owns nearly 30 percent of Barnes & Noble, it's not out of line for him to step in and pick up the rest of what he needs to buy the retail arm, which he's expected to do via a combination of cash payout and taking on some of the business' debt load.

Riggio's overall motives seem to be related to a love of the business itself and the minimal need to add capital to it, but maybe he's got the right idea here. There are a lot of competitors in the e-book space – the popularity of the medium has seen to that – and the Nook isn't faring so well against the Kindle Fire and the other devices in the space.

Maybe Riggio is doubling down on what may well be Barnes & Noble's sole surviving business after the tablets shake out.

This time next year, Barnes & Noble may very well look like a different animal, one with a new focus and a new owner.

Edited by Braden Becker
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