E-Books: Why Barnes & Noble Avoided Borders' Fate

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Andrew Harrer / Bloomberg / Getty Images

A Barnes & Noble bookstore in Washington, D.C.

On a recent afternoon at a Borders bookstore in midtown Manhattan, everything seemed normal. Customers came and went, browsing stocked shelves as employees helped them navigate the store's mazelike three floors.

Five blocks south at the nearest Barnes & Noble, Borders' longtime competitor, the scene and the store looked very similar, besides one glaring difference — the massive Nook e-book kiosk prominently displayed near the front. That kiosk could be the determining factor in one additional contrast that no one could see: one of the stores won't be around much longer.

Last month, Borders Group Inc. filed for bankruptcy protection, announcing plans to close a third of its 659 stores (the Manhattan location on Park Avenue is one of them), which could lead to layoffs of 6,000 employees. That has many asking whether it's only time before the venerable Barnes & Noble, and indeed bookstores in general, vanish as well.

For now, Barnes & Noble seems to be far from its final chapter. The company still has about $900 million more in assets than debt. Borders, as of its last fiscal statements, actually owed about $40 million more to creditors than the total value of its assets.

Even more important, Barnes & Noble's sales are growing. Online sales jumped 52% in its most recent quarter. Barnes & Noble has grabbed a quarter of the electronic-book market — books that are downloaded to handheld digital readers — thanks to its Nook device, despite being up against both Apple and Amazon. And that device, along with the appeal of its stores, has continued to bring customers in through its doors, even as Borders' once hip appeal has faded.

"Barnes & Noble is just a better-run bookstore. They have better locations, their stores are brighter and it's better stocked," says Bill Kavaler, a senior analyst at brokerage firm Oscar Gruss & Son. "And while there's some discomfort with Barnes & Noble's management, you can't say they're not trying to run a good book chain."

But the question is how long Barnes & Noble can stay ahead of the gradual shift from print to digital. Barnes & Noble still has 705 bookstores in the U.S., and those locations are less profitable than they used to be, though that drop seems to be slowing. Worse, its online operation continues to lose money. Overall, Barnes & Noble's profits in its most recent quarter, which ended in January, fell 25% from a year earlier to $60.6 million. In order to stem the losses, Barnes & Noble's executives decided recently to stop paying stockholders a dividend and invest the money in its online and e-books division to boost growth.

"The electronic-book business seems to be the only growing part of the business over all," says Kavaler. "To not be a part of it is worse than losing money in the short-term."

Barnes & Noble launched its electronic device the Nook in 2009 to compete directly with Amazon's Kindle. But unlike the Kindle, the Nook is in color, and it's much easier to carry around than the iPad because of its smaller size. Yes, the Kindle still dominates the market, but the Nook's popularity is growing and has almost become the Mac to Amazon's PC. So far the move seems to be paying off. The Nook boosted Barnes & Noble's sales almost 10% during the holiday season.

Of course, Barnes & Noble is not entirely unscathed in the gradual shift from print to digital. Amazon.com and others have sliced into Barnes & Noble's, and Borders', profits by offering quick, direct delivery. That's forced Barnes & Noble to close a handful of stores in the past few years, including some of its largest outlets.

And it's not just Amazon that Barnes & Noble has to deal with. Independent bookstores seem to be making a surprising comeback as well. In New York City, for instance, at least half a dozen indie booksellers have opened in the past couple years. One of those success stories is Greenlight Bookstore in the Fort Greene neighborhood of Brooklyn, which had $1 million in sales in 2010, more than its owners had expected. Co-owner Jessica Stockton Bagnulo says that's all thanks to knowing what her customers want.

"We tailor our inventory to fit our community," says Bagnulo, whose bookstore often focuses on local authors and events. "These are things that work for us that wouldn't work for anyone else."

Last year, the American Booksellers Association, which represents independent stores around the country, saw a slight uptick in membership, from 1,401 to 1,410. What's more, independent bookstores are boosting sales by getting into the e-book market as well. But they are not coming out with their own devices, so the move could potentially drive sales for devices like the Nook, and Barnes & Noble.

So what will Borders' bankruptcy mean for Barnes & Noble? In the next few months, Barnes & Noble might see its sales drop as closing Borders stores slash prices in liquidation sales. But once the stores close, Borders' bankruptcy might even provide a boost. Wall Street firm Credit Suisse estimates that Barnes & Noble will take more than 50% of the business that is up for grabs from Borders' store closings. Almost 70% of the two retailers' stores overlap, good news for Barnes & Noble as it tries to pick up former Borders customers. Barnes & Noble's CEO William Lynch has said the company might be interested in a "minority" of Borders stores.

"There are still reasons for the big bookstores to exist," says Oscar Gruss & Son analyst Kavaler.