Description

We believe the spinoff of Barnes & Noble College will highlight the value of the individual segments of BKS. Currently, the earnings power of these segments is being obfuscated by losses in the Nook segment and investments in the College digital platform, Yuzu. As these segments are separated, the pro forma entities can provide more optimal capital allocation and get a more appropriate shareholder base. The Retail segment, which is not growing its store count, will generate significant cash flow and focus on minimizing Nook losses and stabilizing the core business. It is currently unlevered and will generate significant free cash flow, allowing it to return significant capital to shareholders. The College segment will be the growth business, and it will invest in opening new stores and expanding its digital offering.

Business mix:

B&N Retail includes 648 bookstores as of May 2, 2015, primarily under the Barnes & Noble Booksellers trade name; Barnes & Noble bookstores generally offer a dedicated NOOK area, a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music, Gift, Magazine and Bargain products. The Company closed 16, 15, and 12 stores in each of FY2013, FY2014, and FY2015, respectively.

B&N College operates 724 stores nationwide, of which 154 stores are co-branded with the universities’ names and Barnes & Noble name. These stores are operated under 453 contracts, which can cover multiple stores and include over 5 million students and faculty and alumni. The Company opened 39, 14, and 24 net new stores in each of FY2013, FY2014, and FY2015, respectively

The Nook segment includes the Company’s digital business, which includes the Company’s eBookstore, digital newsstand and sales of NOOK devices and accessories through B&N Retail and B&N College.

Background:

After acquiring the education business in 2009, BKS combined the business with the Nook segment and incorporated it under the name NOOK Media in July 2012. In the following months, Microsoft acquired a 17.6% interest and Pearson acquired a 5% interest in NOOK Media. Because NOOK Media was a separate entity with outside shareholders, this limited BKS's flexibility in regards to how it could optimize its operations and capital structure. We believe the first significant step was taken in the transformation of BKS in December 2014 when BKS acquired Miscrosoft's and Pearson's ownership in NOOK Media. This gave back to BKS operating control of its assets and the flexibility to combine the Nook consumer business with retail, where there's significant customer overlap. With the integration of Nook and Retail, BKS is able to operationally integrate Nook with retail, which has helped to stem losses at Nook (see below), streamlining and consolidating systems and processes, such as back-end infrastructure and the newly launched BN.com, in which the Company now offers physical and digital products. The repurchase of the Nook Media stake also eliminated BKS's obligation to MSFT to expand nationally, which would have been a large drain on capital to the Company

Catalyst

The separation of Barnes & Noble college from the core retail segment will highlight the value. Currently, the earnings power of these segments is being obfuscated by losses in the Nook segment and investments in the College digital platform, Yuzu. Once these segments are separated, the pro forma entities can provide more optimal capital allocation and get a more appropriate shareholder base. The Retail segment, which is not growing its store count, will generate significant cash flow and focus on minimizing Nook losses and stabilizing the core business (It is currently unlevered and will generate significant free cash flow, allowing it to return significant capital to shareholders). The College segment will be the growth business, and it will invest in opening new stores and expanding its digital offering