It’s Winner Take All in Bookstore Wars

04/23/2008 12:00 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush of MSN Money says bookstore chain Barnes & Noble is in good shape to prevail in the battle with Borders and other competitors.

After a decade of feasting on folksy independent booksellers, megachains Barnes & Noble (NYSE: BKS) and Borders Group (NYSE: BGP) are now doing it to each other.

Even the experts don't know how this tale will end. But if I had to write the ending today, I'd say Barnes & Noble, with 800 stores in 50 states, will prevail. It has the financial strength. And it will win over book lovers with its own brand of community created through in-store cafes, visits from authors, and kids' sections that invite families to plop on the floor and stay awhile.

The market share of independent bookshops has fallen to 25% from 35% in the past five years, estimates Abhay Deshpande, a portfolio manager at First Eagle Funds, which owns shares of the bookseller.

But in an ironic twist, the mega-bookstores have now turned on each other, and the focus on blockbusters has made it easier for larger retailers like Wal-Mart and Costco to compete.

The results have been ugly. Barnes & Noble's stock fell 30% in the past year as the price wars intensified, to trade recently around $30 a share.

Borders has been wounded even more severely. It was facing serious financial troubles before Pershing Square Capital, its largest stockholder, rescued it with a capital infusion this month. That may only prolong the price wars, which some industry insiders describe as the most damaging they have ever seen.

Yet industry insiders and "smart money" investors are betting Barnes & Noble will not just prevail but prosper. Since September, Barnes & Noble's chairman and founder, Leonard Riggio, has spent $107 million buying 3.5 million shares at an average cost of $30.40, according to my analysis of data at Thomson Financial. (Riggio and his brother Stephen Riggio, who is chief executive, own about a third of the company's stock.)

Also, First Eagle Global Fund, for which Deshpande works, upped its position to 3.1 million shares of Barnes & Noble stock as of the end of January, more than 5% of the shares outstanding. 

Investors bullish on Barnes & Noble are also banking on management's record of rewarding shareholders. The company uses its strong cash flow to regularly buy back shares, and it recently upped its dividend. Barnes & Noble started the year with $349 million in cash.

Of course, the final chapter for brick-and-mortar bookshops like Barnes & Noble may be written online. Amazon.com is getting good reviews for its Kindle e-book device, which lets readers download books quickly and easily.

Barnes & Noble has a foothold in that market, too. Though Barnesandnoble.com may not be the first name in online book sales, its revenue grew a healthy 13.4% to $477 million last year. That's still a relatively small piece of the chain's $4.6 billion in annual sales, but it gives Barnes & Noble a toehold in the future if bookstores ever disappear.

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