Barnes & Noble (BKS): Digital Dividend Delivery

The arrival of the so called "e-book" has forced a huge re-think of the way that consumers are likely to purchase books from retailers, and this is creating both threats and opportunities for industry players.

One company which is at the forefront of innovation in this sector is Barnes & Noble (BKS), which is the world’s largest bookseller and perhaps the worlds highest-rated bookselling brand. By the middle of 2010, the company had 717 retail bookstores in 50 States as well as 633 college bookstores serving nearly 4 million students at colleges and universities across the US.

Not only is the company a market leader in book retailing, it is also a high quality dividend paying stock with shareholders enjoying a yield of around 6.5%. Over a 5 year period the average yield from the company is 3.1%, which is impressive considering the investment the group is making to reposition itself to meet new market challenges.

Perhaps a good way to highlight the innovation the group possesses and the challenges that the sector is facing, is to look at its first quarter sales numbers for August 2010. Despite the emergence of the Amazon Kindle device, the iPad from Apple and other "e-readers", total sales for the first quarter were $1.4 billion, a 21% increase compared to the prior year with much of this still coming through its hard-copy book channels.

Despite these strong sales volumes the company reported a consolidated net loss of $63m, or $1.12 per share but included in these results were pre-tax legal expenses of $9.5m for some litigation with activist investor Ron Burkle.

The company is allocating significant financial resources to strengthen its digital businesses in fiscal 2011 to maximize its ability to power growth and capture share of the emerging digital market. Part of this expanded strategy includes a high volume e-commerce site for retailing books and other products and the roll-out of its own e-reader, the NOOK which it has touted as "the most full-featured, low-cost dedicated eBook Reader on the market".

Shares were up sharply (25%) at the start of August after the company announced it was looking at undergoing a strategic review of its operations which could include the sale of much of its "brick and mortar" operations in favor of a stronger online and digital presence. This made up some of the ground lost after the stock had fallen as much as 36% in the first half of 2010.

Its board advised shareholders: "As the world’s largest bookseller, Barnes & Noble (BKS) has an iconic brand and unique competitive advantages we believe will position the company to succeed over time in a rapidly changing market. The Board is confident in Barnes & Noble's (BKS) strategy and fully supportive of the senior management team, which is delivering explosive growth in our fast-developing digital business. The Board has concluded that a review of strategic alternatives is the appropriate next step to take full advantage of our compelling digital opportunities and to create value for shareholders, customers, and employees."

With the company investing heavily to ensure that its offering remains competitive and visible and on the back of its strong presence across US colleges and universities, Barnes & Noble (BKS) could well be considered by dividend seeking investors - particularly if there is a juicy special dividend in the offing from the strategic review.