Barnes & Noble Isn’t Gone, But Management Should Be


Everyone is predicting the demise of Barnes & Noble, Inc. (BKS) with good reason. A closer look at the numbers reveals a company in financial distress.

  • Sales have decreased $3.2 billion or 46% in the last five years.
  • Net profit margin has not cracked 1% and has experienced losses in three of the last five years.
  • The current ratio is at 1.05 at the end of the fiscal year 2018.
  • Inventory days have increased consistently in the last five years from 99.62 days of inventory in 2014 to a whopping 137.1 days of inventory in 2018.
  • Yet, those numbers do not begin to tell the story.

    The Altman Z-Score bankruptcy predictor

    The Altman Z-score has been successfully used to predict bankruptcy. The median Z-score for a stable business is usually between 1.81 and 2.99. Barnes & Noble’s Z-score is close to reaching distress levels, as it decreased from 2.34 in 2017 to 1.89 in 2018. For comparative purposes, Amazon’s current Z-Score is 7.70. With all these financial indicators trending negatively, Barnes & Noble has shown extraordinary resiliency at avoiding bankruptcy.

    After Amazon and Kindle disrupted their business, the company has downsized, going from 1361 stores in 2014 to 630 stores in 2018. They also no longer have preferred stock on its balance sheet and spun off the educational business. However, they have kept shareholders happy by maintaining a high-yield dividend, which will soon become in jeopardy if they cannot stop their revenue decline.

    Can the company turn this around?

    It’s unlikely we’ll see Barnes & Noble disappear in 2018 or 2019. The company’s 2018 financials were accompanied by an unqualified opinion from their auditors Ernst & Young LLP. Auditors have unlimited access to the company’s records and employees to determine if the business has any going concern issues. Also, for a company to be classified with going concern issues, there must be another two items present: recurring losses and negative cash flows from operations. If there’s a silver lining for Barnes & Noble financial situation, it is that they’ve been able to maintain an average gross profit margin of 30.66% during the past 5 years. They have also been able to maintain positive cash flows from their operation, netting $37 million in 2018 compared to $147 million in 2017.

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