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Ryan bullish on B&N
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March 11, 1999: 3:48 p.m. ET
Pru analyst likes bookseller, sees potential spin-off for Internet division
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NEW YORK (CNNfn) - Barnes & Noble reported earnings in line with Wall Street expectations Thursday, underscoring what one analyst sees as a fundamentally strong balance sheet and a healthy core business.
CNNfn spoke with Prudential Securities Senior Retail Analyst Amy Ryan about Barnes & Noble's plans for future growth, the possibility of a spin-off of its Internet division, and what lies ahead for Internet retail as a whole.
Here is her "In Play" interview:
VALERIE MORRIS, CNNfn ANCHOR: We're in the midst of this Dow 10,000-march and yet there are other things that are happening… Talk to us a little about your reaction to what is happening with Barnes & Noble with regard to their earnings and gains.
AMY RYAN, SENIOR RETAIL ANALYST, PRUDENTIAL SECURITIES: Well, the earnings that they announced today were basically in line with the pre-announced range that they'd given at the end of February. So, I think basically the stock today might be just reacting.
People were relieved that they came out and made the numbers. And if you look at the core business earnings relative to what we were expecting they were slightly better than we were anticipating, coming in at $1.07 versus my estimate of $1.05.
MORRIS: So, as they are entering 1999, it's a good strong balance sheet?
RYAN: Definitely. Very strong balance sheet. And they have the investment from Bertlesmann to help them fund the growth for barnesandnoble.com. And that allows them to take their retail cash flow and direct in to other initiatives such as investing in the in-store systems.
JACK CAFFERTY, CNNfn ANCHOR, IN PLAY: Tell us about this idea that there's been some talk they may in fact spin off a separate arm of the company, the .com arm, under an IPO. Are you hearing anything like that?
RYAN: That's what we're thinking, that they might be considering an IPO of barnesandnoble.com. Right now, Barnes & Noble owns 50 percent of barnesandnoble.com and Bertlesmann, which is a German company, owns the remainder.
We're anticipating that they will do an IPO of barnesandnoble.com in order to unlock some of the value attributed to that portion of the business.
MORRIS: And Amy, we know that in recent weeks and months anything with a .com attached has just seemed to skyrocket, even if it can't necessarily stay there. What are you anticipating?
RYAN: Well, if they do this, I think that could unlock some of the value in Barnes & Noble. If you look at their earnings stream on two separate pieces; look at what they're actually earning, excluding the losses from the .com portion of the business, the stock's really not all that expensive.
They're absorbing right now quite a bit of loss for their investments into barnesandnoble.com. And a lot of the Internet companies, Internet retailing companies, are all absorbing the losses in order to grow their customer base.
CAFFERTY: How soon do you expect that they might be able to turn around those losses on the Internet? It seems like companies like Amazon, for example, are having a difficult time getting some numbers in the black.
RYAN: That's a good question -- the timing of when the Internet companies can become profitable is very difficult to answer. In the case of Amazon (AMZN), what they're doing is not only investing in getting their customer base, which they've done a very successful job of, but now they're investing in a lot of infrastructure in order to build the future growth opportunities.
MORRIS: And the growth opportunities really do include trying to grab new customers -- thus the importance of the .com part of the business.
RYAN: Definitely. It's not only grabbing new customers, but we believe that the .com portion of the company can actually help to create some incremental sales.
CAFFERTY: Hindsight being 20/20, was it tactically a mistake, in your opinion, for them go into these huge mega-book stores that they built all around the country that occupy so much space, have high utility bills, high real-estate taxes and big parking areas that have to be maintained and lighted and guarded and all of that? With suddenly this shift to e-commerce I just wonder, if they had to do it over again, if that might have been the wisest choice?
RYAN: I still think it's a wise decision. You can go to the parking lot of a Barnes & Noble and a Borders (BGP) and they're still very full. The comparable sales that we saw from Barnes & Noble out of their superstores during the fourth quarter increase 4.7 percent.
Their operating profit margin during all of 1998 -- just from the retail stores -- improved from 5.8 to 6.3. So, the profitability is still improving. I think the thing that we all have to consider, too, is it's not just the Internet versus Barnes & Noble (BKS) and Borders.
You have to consider also that the independents still have about 17 percent market share. The mail-order clubs and book clubs still have about 26 percent market share.
So, there's a lot of different pieces that the Internet's going to take some business from as well as help, to create some incremental demand.
MORRIS: Going forward -- any risk for them?
RYAN: I think basically what they have done, is they have given us an indication of a lot of… what they plan to invest in and absorb during 1999.
So I think the expectations are out there that they should be able to achieve the numbers that we are looking for now. The big question is going to be sales. If the sales growth comes through I think the earnings are going to be fine.
And the one question that nobody can really answer is: what is the ultimate impact from the Internet going to be, not only in the book industry, but a lot of other retailing categories going forward? 
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