2023-05-03 05:15:00 ET
Summary
- A combination of declining enrollments and declining rates of book purchases has decimated the Barnes & Noble's earnings and effectively made it a nonprofit today.
- Why did we invest incremental capital into BNED this past quarter?
- Barnes & Noble Education has an activist investor that owns more than 10% of the company, which makes up a disproportionate amount of their fund.
The following segment was excerpted from this fund letter.
Barnes & Noble Education ( BNED )
Retailing tends to be a bad business. While there are exceptions such as Walmart, which benefits from scale and local monopolies, retailers are not particularly durable. Barnes & Noble Education operates college bookstores. In the 1990s, this was a good business but today it is not. College students increasingly buy their books from other sources such as Amazon, use pirated PDFs from dubious websites, or do not procure books at all for cost or logistical reasons. The combination of declining enrollments and declining rates of book purchases has decimated the company's earnings and effectively made it a nonprofit today, operating 793 physical bookstores and 606 virtual bookstores serving 6M students, generating $1.5B in revenue... and no profits.
Why did we invest incremental capital into Barnes & Noble Education this past quarter? The short answer is that they are likely to be a much more durable business in two years. Why? How? Four years ago, they launched First Day Complete, a program where they partner with schools and publishers to provide all of a student's books (physical and digital) billed directly through the school. Because of publisher discounts, students save 30-50%, schools receive a commission on book sales, and publishers are actually paid for their products. It's a win-win-win.
Make that a win-win-win-win: It is particularly beneficial for Barnes & Noble Education. To date, when schools convert from a traditional bookstore to First Day Complete, Barnes & Noble Education sees a 90% increase in revenue and a 130% increase in gross profit for that location. While the unit economics of First Day Complete are transformative, unfortunately, less than 20% of schools are currently on the platform. Earlier this year, Barnes & Noble acknowledged that their old model was broken and they were going to aggressively work on converting schools to the program. With the exception of the handful of very profitable locations, conversion would be mandatory. Given an industry structure with limited competition and the fact that First Day Complete is not only a win for students but also generates more revenue for schools, I think it is highly likely that enough schools convert to realize the improved economics.
Barnes & Noble Education has an activist investor that owns more than 10% of the company, which makes up a disproportionate amount of their fund. In other words, they care about the outcome. It appears that they are driving the move to First Day Complete, as well as a company committed to stopping burning money on its Bartleby unit.
BNED is followed by just two sell-side analysts, has a sub-$100M market capitalization and, as best as I can tell, the number of people modeling the company's economics if they are successful with the First Day Complete transition is tiny. The sell-side analysts have published nothing, and their models still do not incorporate the transition. Historical numbers are virtually meaningless since they incorporate COVID school shutdowns and the non-First Day Complete model. If the company is successful in the transition, I think EBITDA should be well in excess of $125M and, because the revenue is more subscription-like in nature, it should garner a higher multiple. With revenue growth, earnings growth, and multiple expansion. It is not hard to justify a valuation several times higher than the current sub-$100M market capitalization if the transition is successful.
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Greenhaven Road Capital - Barnes & Noble Education: A Win-Win-Win-Win