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Barnes & Noble: A besieged giant

The world's largest bookseller faces an unwelcome stock fight while trying to deal with radical market shifts.

March 12, 2010|By Andrea Chang

The story line for bookstore giant Barnes & Noble Inc. is growing ever more dramatic, with falling store sales, increasingly stiff competition and a fierce battle over the company's shares led by a billionaire Los Angeles investor.

Barnes & Noble changed the face of book retailing in the 1990s with its aggressive rollout of hundreds of superstores nationwide. Today, the New York company sells about 300 million books a year and accounts for roughly 18% of U.S. book sales, making it the world's largest bookseller.

But its fortunes may be changing after years as the undisputed king of books. That vulnerability has attracted the attention of Ron Burkle, a shrewd businessman and Democratic fundraiser who built his fortune buying and selling supermarket chains but is better known for his friendships with politicians such as Bill Clinton and Hollywood celebrities.

For months Burkle, 57, has been in the midst of a high-profile buying spree that has included big investments in beleaguered luxury retailer Barneys New York and recession-hit upscale grocer Whole Foods Market Inc.

But it's his zeal for Barnes & Noble that has taken the spotlight as he publicly challenges the family that has controlled the book chain for nearly four decades.

Although Barnes & Noble faces few rivals in the brick-and-mortar bookstore business, analysts say consumers today have more book-buying avenues than ever, with online sellers, general merchandisers, discounters and wholesale clubs offering growing selections at low prices. The company was also late to enter the digital e-reader realm with its Nook device, which now must play catch-up to Inc.'s Kindle.

"Whether it's television, Internet, Wal-Mart, Amazon or an e-reader, there's always, it seems, a new attack on traditional book reading and buying in bookstores," said David Schick, an analyst at Stifel, Nicolaus & Co. "It's just one thing after another."

Since late last year, Burkle has been aggressively buying Barnes & Noble's shares, prompting the company's board of directors in November to adopt a shareholder rights plan, or "poison pill," designed to thwart hostile takeover attempts.

That sparked an increasingly heated fight that has pitted two strong-willed businessmen against each other: Barnes & Noble Chairman Leonard Riggio, who bought Barnes & Noble as a single bookstore in 1971 and is often credited with creating the modern bookstore model, and Burkle, whose fortune is estimated at $3.2 billion.

Burkle's latest move to double his stake to 37%, which would make him the company's largest shareholder, has been met with staunch opposition from Riggio and other company insiders, who own about 31%.

In recent letters to Barnes & Noble's board, the supermarket magnate called the company's stock undervalued and slammed the board for rejecting his request to allow his investment firm, Yucaipa Cos., to raise its stake without triggering the poison pill provisions.

"I believe that once again this board has chosen to protect the personal interests of the Riggio family over the interests of the company's public shareholders," he wrote Feb. 25.

In an interview with The Times, Steve Riggio, Barnes & Noble's chief executive and Leonard Riggio's younger brother, declined to discuss Burkle but said the company was confident in its future and well-positioned to take advantage of the changing nature of selling books.

"Our retail business is a bulwark; it's a solid foundation from which we can reach customers," he said, adding that all of the company's divisions continue to grow market share. "We can understand analysts' concerns about the future of it, but we think that they overstate the impact of competitive pressures far too much."

Yet Barnes & Noble's business, especially in its stores, has been far from robust in recent years.

For the quarter that ended Jan. 30, store sales fell 4.7% to $1.4 billion and sales at stores open at least 15 months fell 5.5%. Although online sales were up 32%, spurred by the launch of the Nook, profit declined and the company gave a disappointing outlook for its current quarter.

The pullback in store sales is due in part to readers such as Jessica Holloway, who used to shop regularly at traditional bookstores before migrating online to Amazon. Since October, after buying a Kindle, the publicist from Studio City has been almost exclusively reading digital content.

"For a while I thought I would miss the touch of a book and flipping pages, but it's actually a lot better," she said. "To be honest, the only books I actually read are the leftover ones that I bought before my Kindle."

And that fundamental shift in reading and book-buying habits has some analysts doubtful that an increased Burkle presence would mean a turnaround for the company.

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