Barnes & Noble Good Clients Financial Bite

Barnes & Noble (NYSE:BKS) announces poor guidance and prepares for the financial scrub brush. With real earnings to be announced several weeks into the future Barnes & Noble has announced that its best customers are its worst financial problem. Most other industries make the most profit on their best customers but not in this case.

At the same time they announce some house keeping about closing an internet distribution center and let slip that their investigation into stock option granting is still underway.

If you read carefully the internet side of the business accounted for slightly less than 10% of sales. By this time you would have expected the internet to be more profitably rooted. Somehow Barnes and Noble cannot significantly connect in this segment.

The book industry has not been able to sell itself other than through price competition. They all seem to offer the same book by the same author as their competitor (either retail or internet) and therefore have not been able to develop additional value added propositions.

The book selling industry needs margin, immediately if not sooner. Amazon should consider buying Barnes and Noble. Institutions have dumped 15% of their Barnes & Noble holdings since last summer. An acquisition allows the combination of best of breed in both the internet and retail categories. Barnes and Noble can entirely close down poorly performing internet distribution. The combination will minimize hyper price competition and allow markets for authors to be developed. In other industries that is called profits and product development.

Something has to give. Barnes and Noble cannot thrive by closing down a few bad stores and opening up a few new ones. Barnes and Noble market cap is roughly similar to Amazon’s 06 gross profit. Jeff Bezos pull the trigger and improve your retail margins with an easy one. If you do not move to maintain your hold on book selling someone else will do it and threaten your entire franchise.

Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) are scanning huge amounts of books into their data-bases. Microsoft associate general counsel Thomas C Rubin in prepared remarks he planned to give at the annual meeting of the Association of American Publishers in New York accused Google of copyright infringement.

As the industry consolidates buying up the traditional outlet which has the legitimate rights to distribute the copyrighted book would create the legal high-ground needed to dominate. The purchase would solve the sticky copyright infringement issue. Publishers who have not been able to leverage electronic rights would be only too happy to sign over these rights and actually see significant cash flow.

Barnes & Noble may actually have a utility value in a greater game. Opening and closing a few stores is just a mugs game.