Barnes & Noble Or the Comp

Home , Borders Group, Fictionwise, Kno, Waldenbooks

Andrew M. Winston INFO 677

Executive Summary

Barnes & Noble, Inc.

Barnes & Noble, Inc. (Barnes & Noble or the Company), ―the nation’s largest bookseller‖ operates in two industry segments: (1) B&N Retail, which includes both the Company’s bricks-and- mortar bookstores and its e-commerce website, barnesandnoble.com, as well as its operation of Sterling Publishing Co., Inc., a general trade book publisher; and (2) B&N College, the college bookstore business operated by its wholly-owned subsidiary, Barnes & Noble College Booksellers, LLC.

Leonard S. ―Len‖ Riggio, the Company’s intense, mercurial founder and Chairman, built the Barnes & Noble enterprise from a single college bookstore he bought at age 24, and continues to drive the Company’s strategy. In 2010, Barnes & Noble appointed a CEO with an e-commerce background, William Lynch, to pursue a digital strategy for the Company, as well as subordinate executives focused on digital textbooks, digital products, and e-commerce. However, the Company’s EVP, Textbooks and Digital Education, left in October 2010 after only six months, and the Company does not appear to have replaced her, or announced who will now be in charge of Textbooks and Digital Education.

In August 2010, the Company announced that it would consider selling itself. Multiple potential acquirors exist, including an investor group led by Riggio. However, if the Company were sold to another buyer, Riggio, and possibly Lynch, would likely have no involvement in its management, and would therefore not be in a position to pursue the Company’s e-book strategy. A buyer for the Company could be selected in the first quarter of this year. Until resolution about a sale is reached, there will be significant uncertainty about the Company’s long-term leadership and strategic direction.

The Company faces some financial challenges, although it appears to be more or less sound. Significantly, the Company has access to over $620 million of unused availability under its revolving credit facility. Although the Company has indicated a strategic commitment to its e-reader and to e- books, and has substantial resources available for those purposes, uncertainty about whether and to whom the Company will be sold, and the effect a sale transaction would have on its strategic direction and available cash and borrowings, particularly if assets of the Company are leveraged to help pay the sales price, make it difficult to predict how the Company will deploy its capital in the near term.

The $9.23 billion college textbook market is expanding, with e-textbook sales expected to double by 2012, and has attracted retail booksellers like the Company, Amazon, and Borders, as well as Apple and Kno (maker of a sophisticated dual-screen e-textbook reader that allows electronic note-taking). Pilot programs have shown that basic e-readers like Amazon’s Kindle and, presumably, Barnes & Noble’s NOOK (given its similarity to Kindle), are not well-suited for use with e-textbooks—in contrast with Apple’s iPad, which has tested well, and Kno’s e-reader.

While well-positioned in the e-textbook market by virtue of its existing ―click and mortar‖ college bookselling operations, which combine physical bookstores and online access, its existing online bookstore for e-books, and NOOKstudy, its free e-textbook and study application for PCs and Macs, Barnes & Noble does not offer an e-reader that is well-suited for e-textbook use. The Company could, however, leverage its existing market position, sales channels, and brand recognition through a strategic alliance with a tablet computer maker—which presents a significant opportunity for Motorola’s new XOOM tablet, as it is competitive with the iPad and shares its advantages for e-textbook use. Motorola Mobility should evaluate a potential relationship with Barnes & Noble regarding e-textbook delivery via XOOM, and if approved, make an overture to the Company.

Andrew M. Winston INFO 677

Company Profile

Barnes & Noble, Inc. 122 Fifth Avenue New York, NY 10011 (212) 633-3300 www.barnesandnobleinc.com (Barnes & Noble, Inc. corporate website) www.barnesandnoble.com (barnesandnoble.com llc website) www.bncollege.com (Barnes & Noble College Booksellers, LLC website)

Barnes & Noble, Inc. (Barnes & Noble or the Company) bills itself as ―the nation’s largest bookseller‖ and ―a leading content, commerce and technology company that provides customers easy and convenient access to books, magazines, newspapers and other content across its multi-channel distribution platform.‖ Barnes & Noble was incorporated in the state of Delaware in 1986, and is a public company, with shares of its common stock traded on the New York Stock Exchange. Leonard Riggio, the Company’s founder and Chairman, and Stephen Riggio, its Vice Chairman, are brothers and as of May 1, 2010 together owned or controlled approximately 32% of the Company’s outstanding capital stock.

The Company views its business as being comprised of two operating segments: (1) B&N Retail, which includes (a) the Company’s retail operations in stores; (b) the operations of barnesandnoble.com llc (B&N.com), a wholly-owned subsidiary of the Company, which operates Barnes & Noble’s well- established retail website, its e-bookstore, and its e-reader business; and (c) the business of Sterling Publishing Co., Inc., a general trade book publisher; and (2) B&N College, which includes the college bookstore business of Barnes & Noble College Booksellers, LLC, a wholly-owned subsidiary of the Company that was acquired in 2009. Below are selected key facts about the Company’s business.

Key officers: B&N Retail Key officers Leonard S. Riggio Chairman Stephen Riggio Vice Chairman William J. Lynch, Jr. Chief Executive Officer Mitchell S. Klipper Chief Executive Officer, Retail Joseph J. Lombardi Chief Financial Officer Christopher Troia Chief Information Officer

Other officers who may John Foley President, eCommerce be relevant to e-text Jamie Iannone President, Digital Products business Jeff Day VP & CTO, B&N.com Bill Saperstein VP Digital Products Hardware Engineering Tracey Weber EVP Textbooks & Digital Education Kevin M. Frain EVP eCommerce Operations

B&N College Key officers Leonard S. Riggio Chairman Max J. Roberts President

Andrew M. Winston INFO 677

Bill Maloney Executive Vice President Patrick Maloney Executive Vice President Barry Brover Chief Financial Officer Stephen Culver Chief Information Officer

Selected financial Barnes & Noble’s fiscal year ends on the Saturday closest to the last day of April. For information (dollars in the fiscal year as of and ending May 1, 2010, Barnes & Noble reported the following thousands): figures. Except where noted, amounts shown are for Barnes & Noble on a consolidated basis, which incorporates results from B&N.com, B&N College, and other subsidiaries.

Sales Barnes & Noble stores $4,320,303 B&N.com $572,763 B&N College $836,458 Other $81,040 Total sales $5,810,564 Gross profit $1,676,745 Net earnings $36,644 Total assets $3,705,686 Total current liabilities $1,724,408 Total long term liabilities $1,077,910

Number of stores: B&N Retail B&N College 720 637

Number of employees: B&N Retail B&N College Approximately 35,000 Approximately 5,000

Key competitors: Key competitors of B&N Retail include Borders Group, Books-A-Million, Waldenbooks, Amazon.com, Apple, Wal-Mart, and Costco. B&N Retail also competes with other retailers that sell books and the expanding e-book market. Key competitors of B&N College include Follett, Chegg.com, and independent college bookstores.

E-bookstore, e-reader, In July 2009, the Company launched what it claims is one of the world’s largest e- and e-text products: bookstores, with more than one million e-books, electronic newspapers, and magazines, accessible via a number of digital platforms, including the NOOK, the Company’s e- reader, launched in October 2009; the iPad; the iPod touch; the iPhone; certain BlackBerry and Motorola smartphones; and laptop and desktop computers. In addition, B&N College offers a free e-textbook and study application for PCs and Macs called NOOKstudy, and already offers thousands of textbooks in e-book format.

SIC Codes and NAICS SIC Codes NAICS Codes Codes for the 2731 – Books publishing 45121 – Book stores & news dealers Company: 2732 – Book printing 451211 – Book stores 2741 – Miscellaneous publishing 451220 – Prerecorded tape, compact 3652 – Prerecorded records and tapes disc, & record stores 5192 – Books, periodicals, & 454111 – Electronic shopping newspapers 511130 – Book publishers 5735 – Record & prerecorded tape stores 5942 – Book stores

Andrew M. Winston INFO 677

References

Barnes & Noble College Booksellers, LLC (n.d.). Leadership. Retrieved January 30, 2011 from http://www.bncollege.com/about_leadership.aspx

Barnes & Noble, Inc. (2010a). Barnes & Noble annual report 2010. Retrieved January 30, 2011 from http://www.barnesandnobleinc.com/documents/bn_annual_report_2010.pdf

Barnes & Noble, Inc. (2010b). Form 10-K for the fiscal year ended May 1, 2010. Retrieved January 20, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-151360

Barnes & Noble, Inc. (2010c). Form 10-Q for the quarterly period ended October 30, 2010. Retrieved January 30, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-277471

Barnes & Noble, Inc. (n.d.a). Management team. Retrieved January 30, 2011 from http://www.barnesandnobleinc.com/our_company/management_team/management_team.html

Barnes & Noble, Inc. (n.d.b). NOOKstudy by Barnes & Noble. Retrieved January 21, 2011 from http://www.barnesandnoble.com/nookstudy/college/index.asp?cds2Pid=37196

Hoover’s, Inc. (2011, January 25a). Barnes & Noble College Booksellers, Inc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Hoover’s, Inc. (2011, January 25b). Barnes & Noble, Inc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Hoover’s, Inc. (2011, January 25c). Barnesandnoble.com llc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Andrew M. Winston INFO 677

Management Profile

Barnes & Noble, Inc.

Leonard S. ―Len‖ Riggio, founder and Chairman of Barnes & Noble, Inc. (Barnes & Noble or the Company) has been and continues to be the driving force behind the Company’s strategic direction. In 2010, Barnes & Noble appointed a CEO with an e-commerce background who appears to be executing successfully on a digital strategy for the Company, as well as subordinate executives focused on digital textbooks, digital products, and e-commerce. However, issues related to a possible sale of the Company and the effects a sale could have on the Company’s management composition, and the recent departure of an executive dedicated to textbooks and digital education, raise questions about the Company’s long-term strategy and about its plans for the e-textbook market.

Len Riggio, Founder and Chairman

“Given the opportunity, Americans will buy more books, in more formats, through different channels, than anyone ever believed possible” (Riggio, 2000).

Len Riggio was born in the Bronx, New York, in 1941. Riggio studied at New York University, working at an NYU bookstore to help cover his college expenses. He dropped out of NYU, though, and founded a college bookstore named the Student Book Exchange NYC at the age of 24. He expanded his business, acquiring other college bookstores, and then buying the Barnes & Noble bookstore on Fifth Avenue in New York in 1971. Riggio embarked on a ―superstore‖ strategy, acquiring more retail bookstore chains, and began online operations in 1997 with barnesandnoble.com.

Fundamentally, Riggio is an optimistic bookselling entrepreneur with the ability to execute. He developed a vision of the Barnes & Noble superstore retail chain, and successfully pursued it. Despite having grown up in the ―bricks and mortar‖ world of book retailing, Riggio has demonstrated that he is not only able to embrace a digital strategy for Barnes & Noble, but also that he is willing to bring on executive talent with expertise in that area, as discussed below.

Having a strong visionary at the helm of the Company, however, carries the risk of loss of strategic focus without his leadership. In August 2010, in the midst of a heated proxy battle with investor Ron Burkle, the Company announced that it would consider selling itself. Multiple potential acquirors exist, including an investor group led by Riggio. Buying the Company would allow Riggio to take it private, and pursue his digital strategy without being subject to public company disclosure requirements or scrutiny from investors. If the Company were sold to another buyer, though, it is likely Riggio would have little or no involvement with its management, and would therefore not be in a position to pursue his vision for the Company; further, the fate of the recently-hired executives discussed in this profile would also be in doubt. It is possible that a buyer for the Company could be selected in the first quarter of this year. Until resolution about a sale is reached, Barnes & Noble faces significant uncertainty about whether Riggio will continue to lead the Company, and its strategic direction.

Truly personal details about Riggio can be hard to come by. He grew up in an Italian neighborhood in Brooklyn. He is married to Louise Riggio and has three children and three grandchildren. His beginnings were humble—Riggio has likened his life to a ―Horatio Alger‖ story (Dugan, 1998)—but his interests now include thoroughbred racing and collecting contemporary art.

Andrew M. Winston INFO 677

Interestingly, it is an article about his involvement with, and abrupt resignation from the board of, an art gallery in Beacon, New York that may shed the most light on his temperament and personality. He is described as ―intense,‖ ―fiercely loyal and generous to a fault,‖ yet ―brusque and emotional‖ and sensitive about his Italian-American heritage, a ―prickly character‖ and a ―force of nature‖ (Nocera, 2007).

For the present, at least, Barnes & Noble’s overall direction will be dominated by the vision of its founder and Chairman, Len Riggio. As noted above, Riggio has embraced a digital strategy and in early 2010 brought on a new CEO to implement that strategy, William Lynch.

William J. Lynch, Jr., Chief Executive Officer

William J. Lynch, 40, was appointed CEO of Barnes & Noble in March 2010. Lynch was promoted to CEO after serving a little over a year as President of the Company’s e-commerce subsidiary, barnesandnoble.com llc. From 2007 to 2009, Lynch was Executive Vice President of Marketing and General Manager of HSN.com (The Home Shopping Network), and from 2004 to 2008 was Chief Executive Officer and co-founder of Gifts.com. Before Gifts.com, he served as Palm, Inc.’s Vice President and General Manager, E-commerce, from 2000 to 2004. Lynch drove each of those e- commerce operations to success. Lynch’s quick rise to the CEO position at the Company took some analysts by surprise, although others saw it as a needed signal of the Company’s commitment to its digital strategy. ―It’s more than symbolic that the new CEO has a technology background,‖ stated Riggio (Millot, 2010).

At Barnes & Noble, Lynch has overseen the launch of the Company’s e-reader, the NOOK, and of the Company’s e-bookstore, as well as the acquisition of Fictionwise, an online e-bookseller. Lynch earned his undergraduate degree in Economics from the University of Texas at Austin and an MBA from the Columbia School of Business.

Departure of Tracey Weber, Executive Vice President, Textbooks and Digital Education

Significantly, Tracey Weber, who was appointed Executive Vice President, Textbooks and Digital Education in April 2010, left the Company—after only six months in that role—to run Citigroup’s North American consumer Internet and mobile operations. While at the Company, Weber was responsible for all digital education offerings and oversaw the launch of NOOKstudy, the Company’s free e-textbook and study application for PCs and Macs. The Company does not appear to have replaced Weber, or announced who will be in charge of Textbooks and Digital Education in her absence.

Jamie Iannone, President, Digital Products; and John Foley, President, E-commerce

In addition to Lynch, two other executives may be relevant to Barnes & Noble’s e-textbook initiative: Jamie Iannone, President, Digital Products; and John Foley, President, E-commerce. Iannone and Foley were appointed to these positions in August 2010. Iannone joined the Company in 2009 as an Executive Vice President, and prior to that held senior positions at eBay. Before eBay, Iannone worked at Booz Allen & Hamilton. He has overseen the Company’s online operations, e-bookstore, and NOOK software applications. He earned his undergraduate degree in Engineering at Princeton University and an MBA at Stanford University.

Before being appointed Barnes & Noble’s President, E-commerce, Foley was CEO of IAC’s The Pronto Network, and oversaw related e-commerce sites, as well as Evite.com and Gifts.com. Foley earned an undergraduate degree in Engineering from the Georgia Institute of Technology and an MBA from Harvard Business School.

Andrew M. Winston INFO 677

References

Araton, H. (2005, May 6). At derby, pinstripes are worn in 2 styles. The New York Times. Retrieved February 6, 2011 from http://www.nytimes.com/2005/05/06/sports/sportsspecial/06araton.html?pagewanted=print

Barnes & Noble, Inc. (2010). Barnes & Noble names Tracey Weber, executive vice president, textbooks & digital education [Press release]. Retrieved February 6, 2011 from http://barnesandnobleinc.com/press_releases/2010_april_8_tracey_weber.html

Dugan, I.J. (1998, June 18). The baron of books. BusinessWeek. Retrieved February 6, 2011 from http://www.businessweek.com/1998/26/b3584001.htm

Dugan, I.J. (1998, June 18). Resume: Leonard S. Riggio. BusinessWeek. Retrieved February 6, 2011 from http://www.businessweek.com/1998/26/b3584003.htm

Griffin, D. & Keoun, B. (2010, October 25). Citigroup hires Weber from Barnes & Noble for internet unit. BusinessWeek. Retrieved February 6, 2011 from http://www.businessweek.com/news/2010-10-25/citigroup-hires-weber-from-barnes-noble-for- internet-unit.html

Hoover’s, Inc. (2011, January 25). Barnes & Noble, Inc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Millot, J. (2010, December 6). Len Riggio, PW’s person of the year. Publishers Weekly, 257(48), 18.

Nocera, J. (2007, October 14). The patron gets a divorce. The New York Times Magazine. Retrieved February 6, 2011 from http://www.nytimes.com/2007/10/14/magazine/14dia- t.html?pagewanted=1&ref=leonardriggio

Rich, M. (2010, March 19). Barnes & Noble promotes the head of its web division to chief executive. The New York Times. Retrieved February 6, 2011 from http://www.nytimes.com/2010/03/19/business/media/19barnes.html?ref=barnesandnobleinc

Riggio, L. (2000, April 3). The Riggio manifesto. Publishers Weekly, 247(14), 25-27.

Trachtenberg, J.A. (2010, August 5). Digital possibilities inspire Riggio. The Wall Street Journal. Retrieved February 6, 2011 from http://online.wsj.com/article/SB10001424052748704741904575409621574209974.html

Zoom Information, Inc. (2011, February 1). John Foley. Zoom People Information. Retrieved February 6, 2011 from LexisNexis Academic database.

Zoom Information, Inc. (2011, January 31). Jamie Iannone. Zoom People Information. Retrieved February 6, 2011 from LexisNexis Academic database.

Zoom Information, Inc. (2011, January 24). William J. Lynch, Jr. Zoom People Information. Retrieved February 6, 2011 from LexisNexis Academic database.

Zoom Information, Inc. (2010, December 24). Tracey Weber. Zoom People Information. Retrieved February 6, 2011 from LexisNexis Academic database.

Andrew M. Winston INFO 677

Financial Analysis

Barnes & Noble, Inc.

Barnes & Noble, Inc. (Barnes & Noble or the Company) is overall in a viable but not particularly strong financial position. As described in more detail below, the Company has access to significant borrowing availability, which it could presumably use to fund e-reader and e-textbook initiatives. Despite that availability, and notwithstanding stronger than expected 2010 holiday sales, uncertainty about whether the Company will be sold, and the effect that a sale would have on its strategic direction and financial position (particularly in a leveraged buyout), means that its finances, and their effect on its ability to pursue it e-reader and e-textbook strategy, will continue to bear watching.

Consolidated Statement of Operations

26 Weeks Ended 13 Weeks (In thousands, October 30, Ended May except per share data) 2010 Fiscal 2010 2, 2009 Fiscal 2008 Fiscal 2007 Sales $ 3,302,147 5,810,564 1,105,152 5,121,804 5,286,674 Cost of sales and occupancy 2,500,327 4,133,819 773,491 3,540,596 3,679,845 Gross profit 801,820 1,676,745 331,661 1,581,208 1,606,829 Selling and administrative expenses 786,177 1,392,207 286,554 1,251,524 1,225,791 Depreciation and amortization 113,681 207,774 45,879 173,557 168,600 Pre-opening expenses 54 3,518 2,472 12,796 10,387 Operating profit (loss) (98,092) 73,246 (3,244) 143,331 202,051 Interest income (expense), net and amortization of deferred financing fees 26,053 (28,237) (199) (2,344) 7,483 Earnings (loss) from continuing operations before taxes (124,145) 45,009 (3,443) 140,987 209,534 Income taxes (49,023) 8,365 (1,374) 55,591 74,623 Earnings (loss) from continuing operations (net of income tax) — 36,644 (2,069) 85,396 134,911 Earnings (loss) from discontinued operations (net of income tax) — — (654) (9,506) 888 Net earnings (loss) (75,122) 36,644 (2,723) 75,890 135,799 Net loss attributable to noncontrolling interests 37 32 30 30 — Net earnings (loss) attributable to Barnes & Noble, Inc. (75,085) $ 36,676 (2,693) 75,920 135,799 Earnings (loss) attributable to Barnes & Noble, Inc. Earnings (loss) from continuing — $ 36,644 (2,069) 85,396 134,911 operations Less loss attributable to — 32 30 30 — noncontrolling interests Net earnings (loss) from continuing operations attributable to Barnes & Noble, Inc. — $ 36,676 (2,039) 85,426 134,911 Basic earnings per common share

Andrew M. Winston INFO 677

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc. (1.34) $ 0.64 (0.04) 1.50 2.07 Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc. — — (0.01) (0.17) 0.01 Net earnings (loss) attributable to Barnes & Noble, Inc. — $ 0.64 (0.05) 1.33 2.08 Diluted earnings per common share Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc. — $ 0.63 (0.04) 1.46 1.99 Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc. — — (0.01) (0.17) 0.01 Net earnings (loss) attributable to Barnes & Noble, Inc. (1.34) $ 0.63 (0.05) 1.29 2.00 Weighted average common shares outstanding Basic 56,239 55,344 54,759 55,207 63,662 Diluted 56,239 56,153 54,759 56,529 66,221

In addition to the results indicated above, on January 6, 2011, the Company reported that its 2010 holiday sales significantly exceeded expectations, with NOOK and e-book sales helping boost sales to an increase of 78% over the prior year’s holiday sales.

Consolidated Balance Sheet

October 30, May 2, January 31, (In thousands, except per share data) 2011 May 1, 2010 2009 2009 ASSETS Current assets Cash and cash equivalents $ 30,163 $ 60,965 86,594 281,608 Receivables, net 185,253 106,576 70,721 80,998 Merchandise inventories 1,761,118 1,370,111 1,233,756 1,203,471 Prepaid expenses and other current assets 126,326 181,825 121,563 121,102 Current assets of discontinued operations — — — 30,199 Total current assets 2,102,860 1,719,477 1,512,634 1,717,378 Property and equipment Land and land improvements 8,618 8,618 9,298 9,298 Buildings and leasehold improvements 1,210,232 1,212,567 1,102,439 1,096,801 Fixtures and equipment 1,638,652 1,594,048 1,331,524 1,385,454 2,815,233 2,443,261 2,491,553 Less accumulated depreciation and amortization 2,101,057 2,003,199 1,642,517 1,670,839 Net property and equipment 756,445 812,034 800,744 820,714 Goodwill 526,327 528,541 254,842 240,008 Intangible assets, net 573,789 580,962 82,691 83,443

Other noncurrent assets 59,845 64,672 13,368 8,000 Noncurrent assets of discontinued operations — — — 8,321 Total assets 4,019,266 $ 3,705,686 2,664,279 2,877,864 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities

Andrew M. Winston INFO 677

Accounts payable 1,318,744 $ 868,976 698,315 746,599 Accrued liabilities 608,301 755,432 587,454 704,343 Short-term note payable 100,000 100,000 — — Current liabilities of discontinued operations — — — 18,807 Total current liabilities 2,027,045 1,724,408 1,285,769 1,469,749 Long-term debt 376,900 260,400 — — Deferred taxes 31,712 311,607 79,369 79,170 Other long-term liabilities 481,426 505,903 387,318 393,006 Noncurrent liabilities of discontinued operations — — — 12,713 Shareholders’ equity Common stock, $.001 par value; 300,000 shares authorized; 90,231, 88,993, 88225 and 87,681 shares issued, respectively 90 89 88 88 Additional paid-in capital 1,313,678 1,286,215 1,274,454 1,262,358 Accumulated other comprehensive loss (13,212) (13,212) (12,015) (14,503) Retained earnings 576,277 681,082 697,042 721,200 Treasury stock, at cost, 33,360, 33,285, 33,148 and (1,053,650) (1,052,356) (1,049,328) (1,047,529) 33,066 shares, respectively Total Barnes & Noble, Inc. Shareholders’ equity 823,183 901,818 910,241 921,614 Noncontrolling interest — 1,550 1,582 1,612 Total shareholders’ equity 823,183 903,368 911,823 923,226 Commitments and contingencies — — — — Total liabilities and shareholders’ equity $4,019,266 3,705,686 2,664,279 2,877,864

Ratios

The financial ratios of the Company, Amazon.com, Inc. (Amazon) and Borders Group, Inc. (Borders), and the industry standard ratios, were taken from The Motley Fool investment website. The Company’s current ratio as of October 30, 2010 was 1.037, and as of May 1, 2010 was 0.997. Both of those are below the industry standard ratio of 1.60. For comparison purposes, the current ratios of Amazon and Borders are 1.30 and 1.00, respectively. The Company’s low current ratio at first glance suggests a lack of liquidity, but the Company has in place a $1 billion revolving credit facility. $376.9 million was outstanding under the facility as of October 30, 2010, meaning that over $620 million of borrowing is available (subject to the Company’s meeting the borrowing requirements under the facility). The Company indicated on p. 30 of its most recent 10-Q that it believes its cash on hand, cash flow from operations, and borrowings under the credit facility would allow it ―to meet [its] normal working capital and debt service requirements for at least the next twelve months‖ (Barnes & Noble, Inc., 2010d).

The Company’s quick ratio as of October 30, 2010 was 0.169, and as of May 1, 2010 was 0.203. Both are below the industry standard ratio of 0.70. For comparison purposes, the quick ratios of Amazon and Borders are 1.00 and 0.10, respectively. The Company’s low quick ratio—well below industry standards—suggests that the Company has a significant amount of inventory on hand.

The Company’s total debt to equity ratio as of October 30, 2010 was 0.58, and as of May 1, 2010 was 0.40. Both of those ratios are below the industry standard ratio of 0.75. For comparison purposes, Amazon’s total debt to equity ratio is 0.09 (the total debt to equity ratio of Borders was not available). The fact that the Company’s ratio is below the industry standard suggests that the Company has not maximized its leverage and might be able to take on additional debt if needed.

Andrew M. Winston INFO 677

Stock Information

The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol BKS. Selected stock data is set forth below.

Most recent closing price per share (as of February 11, 2011): $18.50 52-week range in share price: $11.89 - $24.71 Market capitalization: $1.11 billion P/E ratio: n.a.

The Company’s price to earnings ratio of ―n.a.‖ means that it is currently experiencing a net loss per share. Nonetheless, despite these losses, the Company’s stock price remains well within the 52-week range indicated above, which suggests a level of investor confidence despite losses. The Company has also paid dividends for the past five years, another indication of a degree of financial health.

Analysis

Broadly speaking, Barnes & Noble is weathering some financial challenges, as suggested by the financial ratios and price to earnings ratio discussed above. Nonetheless, the Company has access to significant capital resources in the form of over $620 million of unused availability under its revolving credit facility. In addition, the Company could theoretically sell additional common stock to raise equity capital. However, the Company has indicated that it is considering selling itself, possibly reaching a deal in the first quarter of 2011, and a sale transaction, if consummated, could result in a ―going private‖ transaction in which the Company ceases to be a publicly traded company. In light of the foregoing, it is unlikely the Company will raise additional equity capital by selling new shares. In addition, if the Company were to pursue a purchase of Borders, in light of Borders’ weakened financial condition, the Company would have less capital available for investment in e-reader and e-textbook initiatives, as available cash and borrowings under the credit facility would presumably be used for the purchase.

The Company appears to be more or less stable financially in the near term, although the financial ratios noted above are cause for concern. While the Company has indicated a strategic commitment to its e-reader and to e-books, and has the wherewithal to devote substantial resources to them if it chooses, uncertainty about whether and to whom the Company will be sold, and the effect a sale transaction would have on its strategic direction and available cash and borrowings, particularly if assets of the Company are leveraged to help pay the sales price, make it difficult to predict how the Company will deploy its capital in the near term.

Andrew M. Winston INFO 677

References

Barnes & Noble, Inc. (2010a). Barnes & Noble annual report 2010. Retrieved January 30, 2011 from http://www.barnesandnobleinc.com/documents/bn_annual_report_2010.pdf

Barnes & Noble, Inc. (2010b). Form 8-K dated January 6, 2011. Retrieved February 11, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=950157-11-10

Barnes & Noble, Inc. (2010c). Form 10-K for the fiscal year ended May 1, 2010. Retrieved January 20, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-151360

Barnes & Noble, Inc. (2010d). Form 10-Q for the quarterly period ended October 30, 2010. Retrieved January 30, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-277471

Investopedia ULC (n.d.). Dictionary – quick ratio. Retrieved February 13, 2011 from http://www.investopedia.com/terms/q/quickratio.asp

The Motley Fool (n.d.a). Amazon.com, Inc. – ratios. Retrieved on February 13, 2011 from http://caps.fool.com/Ticker/AMZN/Ratios.aspx?source=itxsittst0000001

The Motley Fool (n.d.b). Barnes & Noble, Inc. Retrieved on February 13, 2011 from http://caps.fool.com/Ticker/BKS.aspx

The Motley Fool (n.d.c). Barnes & Noble, Inc. – ratios. Retrieved on February 13, 2011 from http://caps.fool.com/Ticker/BKS/Ratios.aspx?source=icasittab0000007

The Motley Fool (n.d.d). Borders Group, Inc. – ratios. Retrieved on February 13, 2011 from http://caps.fool.com/Ticker/BGP/Ratios.aspx?source=itxsittst0000001

The Wall Street Journal (n.d.). Barnes & Noble, Inc. – valuations and ratios. Retrieved on February 13, 2011 from http://online.wsj.com/quotes/ratios.html?mod=wsj_qt_nav_quote&symbol=BKS&type=usstocks

Andrew M. Winston INFO 677

Strategic Market Analysis

Barnes & Noble, Inc.

Overview

Barnes & Noble operates a bookselling business that includes the sale of books, magazines, newspapers, and other materials in hard copy form in its retail bookstores and via its e-commerce website barnesandnoble.com (B&N.com), referred to as its B&N Retail operations, and the sale of textbooks, school supplies, and related items through its college and university bookstores, referred to as its B&N College operations. The Company operates 1,357 bookstores, including 637 college bookstores. Through B&N.com, the Company sells hard copy books as well as e-books. Approximately 14% of the Company’s sales for its 2010 fiscal year were from B&N College, although the B&N College operations were acquired by the Company during its 2010 fiscal year, and the Company expects B&N College sales to account for 25% of total sales on a full year basis.

In July 2009, the Company launched the NOOKbook Store, one of the world’s largest e- bookstores, now offering over two million e-books, electronic newspapers, and magazines, accessible via a number of digital platforms, including the NOOK, the Company’s e-reader; the iPad; the iPod touch; the iPhone; certain BlackBerry and Motorola smartphones; and laptop and desktop computers. The NOOK, the Company’s e-reader, was launched in October 2009. B&N College also offers a free e- textbook and study application for PCs and Macs called NOOKstudy, and already makes available thousands of textbooks in e-book format.

Industry analysis suggests that tablet computer manufacturers like Apple appear to be well- positioned in terms of e-textbook delivery devices. Barnes & Noble, however, is well positioned as a sales channel by virtue of its college bookstore and e-bookstore businesses, and its NOOKstudy application, and could leverage its strengths by pushing sales of e-textbooks for use on laptop computers via its NOOKstudy application, and by exploring strategic alliances with a tablet computer maker, or Kno.

Market Overview

Barnes & Noble is the leading retail bookseller in the U.S., driven by upscale retail superstores featuring Starbucks cafés creating a unique sense of place, and a leading e-commerce website. Because the market for e-textbook products can be defined fairly readily, it is not necessary to discuss the overall market for B&N Retail products, although the Company’s powerful brand presence, name recognition, and physical and online distribution channels should be borne in mind, as they—together with B&N College’s significant presence in the college market—constitute components of a powerful platform for its e-textbook efforts.

The market for e-textbooks, and e-readers used to access them, includes undergraduate and graduate students, and their professors, at institutions of higher learning. This demographic is growing: total enrollment for higher education students is projected to increase between 17% and 20% between 2002 to 2014. Enrollment is projected to increase approximately 16% for undergraduate students, 21% for graduate students, and 32% for professional students during the same period. As of fall 2008, 19.1 million students were enrolled in institutions of higher education.

According to the National Association of College Stores, Inc., the average ―full-time equivalent,‖ or FTE, student spent an average of $745 at their school’s bookstore (including its e-commerce site), with

Andrew M. Winston INFO 677 an average of $483 going to books ($307 for new books and $157 for used), with the rest spent on school insignia products, computer items, supplies, and food. This represents a textbook market of approximately $9.23 billion dollars per year, although that figure is conservative, because it does not include sales to professors, sales of ancillary non-textbook items, or textbook purchases from sources other than the student’s college bookstore, and is based on the 2008 enrollment figure of 19.1 million.

Industry

As noted above, Barnes & Noble competes principally in the retail bookselling industry, selling fiction, nonfiction, and children’s books, magazines, music, movies, café products, its NOOK e-reader, and e-books through its physical bookstore locations or online via B&N.com, and operates a college and university bookstore business, selling textbooks, course materials, and ancillary items through bookstores on college and university campuses. Barnes & Noble’s e-textbook offerings and strategy involve both of these industry segments, and it will be instructive to consider each of them, and then to discuss their intersection in the e-textbook industry segment, which involves elements of both retail and college bookselling—and trends and competitors of its own.

Retail Bookselling

The retail bookselling industry includes companies like Barnes & Noble, Borders Group, Inc. (Borders), and Books-A-Million, Inc. (Books-A-Million), which operate both bricks-and-mortar retail stores and e-commerce websites, as well as purely online retailers, like Amazon.com, Inc. (Amazon). Of the bookstore companies (excluding purely online retailers), Barnes & Noble is the strongest player, holding 29.8% of market share in 2010, with Borders the next-strongest with 14.3% of market share. B&N Retail operates 720 stores, compared to Borders’ 521 superstores, 175 mall-based and other stores, and 29 airport stores. Apple, Inc. (Apple) and Google, Inc. (Google) have also launched retail e- bookstores that compete in this space. Barnes & Noble, Amazon, and Borders all offer e-readers as well: Barnes & Noble’s NOOK, Amazon’s Kindle, and Borders’ Kobo.

The retail bookselling industry currently faces significant uncertainty about the fates of both Barnes & Noble and Borders. In August, 2010, the Company announced that it is considering a sale of its business; a deal could be reached as early as the first quarter of 2011. While a buyout group led by Leonard Riggio, the Company’s founder and chairman and the architect of its strategy—including its strategic commitment to e-books—is among the buyers, it is possible that another buyer could prevail. If another buyer acquires the Company, it is likely neither Riggio nor William Lynch, its new CEO hired to lead the Company’s growth via an e-book strategy, would remain as executives. In addition, a sale of the Company could involve the use of significant portions of the Company’s cash resources and/or borrowing availability to pay the purchase price. Until a sale transaction is consummated, or the Company announces that there will be no sale, the Company’s commitment to its e-book and e-textbook strategy, and the financial resources available to it to pursue that strategy, will remain uncertain.

Borders has drawn attention for its increasingly dire financial straits in recent months, with Barnes & Noble itself reportedly considering a bid to purchase its competitor at one point. Borders has filed for Chapter 11 bankruptcy protection, meaning that it will attempt to restructure its debt and streamline its business in order to regain financial health, rather than liquidate and sell off all its assets to pay creditors, although Wall Street observers have expressed doubts about whether Borders’ attempt to avoid liquidation will succeed.

Andrew M. Winston INFO 677

College Bookselling

Barnes & Noble’s competitors in retail bookselling do not currently compete with it to the same extent in the college bookselling industry segment. B&N College is able to employ what the National Association of College Stores, Inc. refers to as a ―click and mortar‖ strategy, which combines the convenience of online book ordering with a physical presence that offers an easy way to return books and pick up needed items immediately, and provides accurate information about required textbooks. Although most colleges and universities operate their own bookstores, Barnes & Noble has a significant presence in this industry segment: the Company’s B&N College bookstores represented in its 2010 fiscal year approximately 16% of the college bookstores in the U.S., covering an aggregate of almost four million students and professors. The Company hopes to use its newly-launched NOOKbook Store to sell e-textbooks, and the visibility and name-recognition its college bookstore presence and its free NOOKstudy application provide will bolster its efforts.

Competitors in the traditional college bookstore industry segment include Follett Corporation (Follett), a private company with over 800 college bookstores, an e-commerce site, and an application known as CafeScribe that allows access to a library of over 10,000 e-textbooks. Notwithstanding its greater physical presence in college bookselling, Follett has neither an e-reader nor the broad retail and e- commerce experience and name recognition, or the high-visibility e-bookstore distribution channel, of Barnes & Noble. Nebraska Book Co. is another college bookstore competitor, operating 277 stores. Amazon and Borders also compete with B&N College by selling textbooks.

E-Textbooks

The e-textbook industry segment is expected to grow dramatically, with projected sales of $308 million (up from $138 million this year). It remains to be seen how well e-textbook readers like the Kindle and the NOOK are accepted by students and academic institutions. In June 2010, BusinessWeek reported that a pilot program in which Amazon Kindles were tested by students at seven universities found that the e-reader was ―a poor replacement for a textbook, hard to use in the classroom, and difficult to navigate,‖ with ―most schools reporting that students were dissatisfied with the device as a classroom tool‖ and had stopped using it after only a few weeks into the pilot program. In contrast, the same article reported that IMD Business School in Switzerland had started using the iPad in an executive education program, with ―overwhelmingly positive feedback‖ from students and professors. Given their similarity in functionality, one would expect the NOOK (and Borders’ Kobo) to suffer from the same problems as the Kindle; it is perhaps telling that Barnes & Noble has apparently not attempted to make textbooks available on the NOOK to a great extend; and its NOOKstudy application for PCs and Macs does not appear to be usable on the NOOK e-reader.

In another indication of the advantages tablet computers may have for e-textbook use, this month, McGraw-Hill, a textbook publisher, signed an agreement with Inkling, a maker of interactive textbooks, to increase the number of McGraw-Hill titles available through the iPad tablet computer sold by Apple, Inc. (Apple). Interestingly, a more sophisticated e-reader called the Kno may prove to be more of a competitor for the iPad. The Kno has two screens, offering a more textbook-like user experience, and allows for note-taking. Kno has already entered into agreements with four textbook publishers, including McGraw-Hill, and has begun early testing with several universities.

Analysis

A number of factors make analysis of the e-textbook ―industry‖ in which Barnes & Noble competes challenging. The Company’s e-textbook initiative spans both the retail bookselling industry segment and the college bookselling industry segment, and includes factors unique to e-textbook sales.

Andrew M. Winston INFO 677

Previously-noted uncertainties about whether or not the Company will be sold in the first part of this year (or later), the effect such a sale would have on the Company’s management and strategy and capital resources, and the bankruptcy of its major retail competitor Borders (which may yet result in Borders’ liquidation), mean that the industry will continue to bear watching.

Notwithstanding these uncertainties, several salient industry themes emerge:

 The college textbook market is a lucrative and expanding one.

 Companies that are active in retail bookselling, like Barnes & Noble, Amazon, and Borders, are strongly interested in the textbook—and e-textbook—market.

 E-textbook sales are projected to more than double by 2012.

 Pilot programs have shown that basic e-readers like the Kindle and, presumably, the NOOK, are not well-suited to e-textbooks, in contrast with tablet computers like the iPad and, potentially, more sophisticated, ―book-like‖ e-readers that allow note-taking, such as the Kno.

 Barnes & Noble is well-positioned as a result of its existing ―click and mortar‖ college bookselling operations, and its NOOKstudy application.

Currently, tablet computer manufacturers like Apple seem to be well-positioned in terms of e- textbook delivery devices. Barnes & Noble is well positioned as a sales channel by virtue of its college bookstore and e-bookstore, and its NOOKstudy application. While it appears that the NOOK e-reader in its current incarnation is unlikely to be useful for e-textbook purposes, Barnes & Noble could nonetheless move to take advantage of its strengths by pushing e-textbooks for use on laptop computers via its NOOKstudy application, and by exploring strategic alliances with a tablet computer maker, or Kno, to leverage Barnes & Noble’s strengths in the industry.

Andrew M. Winston INFO 677

References

Barnes & Noble, Inc. (2010a). Form 10-K for the fiscal year ended May 1, 2010. Retrieved January 20, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-151360

Barnes & Noble, Inc. (2010b). Form 10-Q for the quarterly period ended October 30, 2010. Retrieved January 30, 2011 from http://forinvestors.barnesandnobleinc.com/secfiling.cfm?filingID=1193125-10-277471

Barnes & Noble, Inc. (n.d.a). NOOKstudy by Barnes & Noble. Retrieved January 21, 2011 from http://www.barnesandnoble.com/nookstudy/college/index.asp?cds2Pid=37196

Barnes & Noble, Inc. (n.d.b). Welcome to the NOOKbook store. Retrieved February 27, 2011 from http://www.barnesandnoble.com/ebooks/index.asp

Bell, S. (2010, June 17). What we need to ―kno‖ (about e-textbook devices). Library Journal. Retrieved February 27, 2011 from http://www.libraryjournal.com/lj/communityacademiclibraries/885402- 265/what_we_need_to_kno.html.csp

Damast, A. (2010, June 10). E-book readers bomb on college campuses. BusinessWeek. Retrieved February 27, 2011 from http://www.businessweek.com/bschools/content/jun2010/bs20100610_200335.htm

Gotaas, M. (2010). Book stores in the U.S. IBISWorld. Retrieved February 27, 2011 from IBISWorld database.

Hoover’s, Inc. (2011, January 25a). Barnes & Noble College Booksellers, Inc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Hoover’s, Inc. (2011, January 25b). Barnes & Noble, Inc. Hoover’s Company Records – In-depth Records. Retrieved January 30, 2011 from LexisNexis Academic database.

Hoover’s, Inc. (2011, February 22a). Follett Corporation. Hoover’s Company Records – In-depth Records. Retrieved February 27, 2011 from LexisNexis Academic database.

Hoover’s, Inc. (2011, February 22b). Follett Higher Education Group. Hoover’s Company Records – In-depth Records. Retrieved February 27, 2011 from LexisNexis Academic database.

Kane, Y. (2011, February 25). Publishers expand e-textbook offerings for classroom. The Wall Street Journal. Retrieved February 25, 2011 from http://online.wsj.com/article/SB10001424052748703905404576164702261714850.html?KEYW ORDS=e-textbook

National Association for College Stores, Inc. (2010). Higher education retail market facts and figures. Retrieved February 27, 2011 from http://www.nacs.org/research/industrystatistics/higheredfactsfigures.aspx

National Center for Education Statistics (n.d.). Retrieved February 10, 2011 from http://nces.ed.gov/programs/projections/projections2014/sec_2a.asp

Andrew M. Winston INFO 677

Spector, M. & Trachtenberg, J. (2011, February 12). Chapter 11 for Borders, new chapter for books. The Wall Street Journal. Retrieved February 27, 2011 from http://online.wsj.com/article/SB10001424052748704329104576138353865644420.html

Trachtenberg, J.A. (2009, August 11). Barnes & Noble heads back to school with college booksellers purchase. The Wall Street Journal. Retrieved February 27, 2011 from http://online.wsj.com/article/SB124990362890119179.html?KEYWORDS=barnes++noble+colle ge#printMode

Andrew M. Winston INFO 677

I certify that:

 This paper/project/exam is entirely my own work.

 I have not quoted the words of any other person from a printed source or a website without indicating what has been quoted and providing an appropriate citation.

 I have not submitted this paper/project to satisfy the requirements of any other course.

Signature Andrew M. Winston Date March 13, 2011