Nathan Klein

Books-A-Million


Books-A-Million Financials Compared to Barnes & Noble

Books-A-Million (BAM) and Barnes & Noble are the two of the leading retailers of
books and book merchandise in the United States. Now that Borders has closed, the
competition between book retailers has narrowed and BAMs main competitor is Barnes &
Noble. The two companies share similar merchandise and offer similar amenities to
consumers, but a detailed comparison shows that the two companies are not the same in
terms of financial health.

BAMs gross profit margin percentage is about on par with its main competitor.
BAMs gross profit margin is 26.15% this quarter with a one-year average of 28.07%
(YCHarts). Conversely, Barnes & Nobles quarterly gross profit margin is 26.64%, but the
companys one-year average totaled to 26.62% (YCharts). Gross profit margin is the
amount of money left over to pay for additional expenses and to save for the future
(Investopedia). In other words, for every dollar that BAM makes this quarter, the company
is able to save $0.26. Both companies have a positive gross profit margin, but BAMs one-
year average is slightly (1.45%) higher than its competitor. BAM has the advantage over its
competitor in terms of gross profit margin. While Barnes & Noble is only able to save about
$0.26 of every dollar it made this past year, BAM is able to save $0.28.

Another financial indicator used to assess the health of companies is net profit
margin. Net profit margin indicates how much profit a company actually keeps in earnings
(Investopedia). A company with a higher net profit margin is able to control its costs better
and use its resources more efficiently than its competitors (Investopedia). A companys
gross earnings can be deceiving. For instance, if a company earned $10 million and had a
net profit of $1 million, they would have a net profit margin of 10%. If the same company
made $20 million the next year but only had a net profit of $1.5 million, the net profit
margin would have fallen to 7.5%. An increase in gross income does not always mean an
increase in net profit. BAMs net profit margin this quarter is -6.91% with a one-year
average of -3.35% (YCHarts). Barnes & Nobles net profit margin this quarter is 0.76% with
a one-year average of -2.44% (YCharts). Both companies actually lost money over the past
year, but Barnes & Noble has been able to recover financially this quarter while BAM has
not. Barnes & Nobles higher net profit margin indicates that the company is keeping more
in earnings, controlling its costs better, and using its resources more efficiently than BAM.

In addition to gross profit margin and net profit margin, another financial indicator
is operating profits margin percentage (OPM). OPM details how much money a company
has left over after it pays its variable costs (wages, utilities, etc.) (Investopedia). This ratio
is useful to see how much a company makes before interest and tax, and is necessary to pay
off fixed expenses. OPM is best utilized in determining the quality of a company if the figure
is tracked over time. Time progression will show if the company is increasing its ability to
pay off its variable costs (increasing OPM), remaining the same, or getting worse (declining
OPM). OPM is calculated by taking operating income/net sales (Investopedia). BAMs OPM
last year was 1.37% (6.9 million/ 503.8 million) compared to -0.85% (-4 million/468.5
million) from the year before (Wall Street Journal) (Business Wire). Barnes & Nobles OPM
last year was -3.14% (-2.149 billion/6.839 billion) compared to 3.18% (226.5 million/ 7.13
billion) the previous year. (Finance) (Find the Company). The OPM trend for BAM is
heading in a positive direction indicating that the company is becoming increasingly able to
pay off its variable costs and fixed expenses. On the other hand, Barnes & Nobles OPM is
declining from a previously positive year which could indicate that the company is
becoming more unable to pay its variable costs.

Operating expense percentage (OER) is a tool used to measure the cost of a property
compared to the income that a property generates (Investopedia). OER is calculated by
taking the operating expense/gross operating income, and can be used to compare the
expenses from one property to the next (Investopedia). Once the OER is calculated,
investors can dig deeper to find out why one property has a much higher OER for a specific
expense than another. BAMs OER last year was -14.93 (Google Finance). Barnes & Nobles
OER is significantly higher, with an average of 77.89 last year (Google Finance). This
indicates that Barnes & Nobles properties are able to generate a much larger income than
their property costs them. On the other hand, BAMs properties are costing them more
money than what they can generate in income. BAM should drill down to find out if there is
a single cost (rent, utilities, maintenance) that could be causing the company to have such a
low OER.

Another financial measure is the P/E ratio, or price earnings ratio percentage. P/E
ratio is the most common measure of the cost of a stock. A higher P/E ratio can indicate
that investors are expecting larger growth in the future for a company or an industry
(Investopedia). The P/E ratio can be used as a benchmark to compare between other
companies or between a company and industry averages. BAMs current P/E ratio is
14.38% (Market Watch) while Barnes & Nobles current P/E ratio is -5.56% (Market
Watch). These statistics indicate that investors see more potential growth potential for
BAM than its competitor. P/E ratios, however, should be used in conjunction with other
financial indicators to assess the growth potential of a company. The denominator in the
P/E calculation is susceptible to manipulation due to accounting reporting techniques, and
thus can be deceptive; the quality of the P/E (is) only as good as the quality of the
underlying earnings number (Investopedia).

In addition to P/E ratio, the asset turnover ratio gives investors a good idea of how
efficiently companies are using the assets that they have acquired. In general, a higher
number is considered better as it indicates that a company is using it assets efficiently
(Investopedia). When comparing asset turnover between companies, it is important to
compare between companies in the same industries; asset turnover ratios between
different industries can vary greatly. BAMs asset turnover ratio is 1.73% compared with
Barnes & Nobles 1.82% (Market Watch). This indicates the Barnes & Noble is more
efficient than BAM at utilizing its assets efficiently, and thus is seeing a higher proportion of
its sales based on its assets.

Debt to equity ratio is another financial measure to assess the health of a company.
Debt to equity ratio shows how much or little a company is financing its assets with debt. A
high debt/equity ratio means that the company is financing its assets and growth with debt
(Investopedia). The debt/equity ratio is a double-edged sword. On one hand, a higher
debt/equity ratio can generate more earnings for a company by providing resources to buy
additional assets. The revenue generated from the additional assets can then be passed
onto the shareholders with an increased stock price or paid out in dividends. Conversely, a
company might take on too much debt, and could potentially go bankrupt (Investopedia).
BAMs current quarterly debt/equity ratio is 0.856 while Barnes & Nobles is 0.368
(YCharts). Barnes & Nobles debt/equity ratio is lower than BAMs, but as discussed before
this figure can be positive or negative depending on how much debt either company can
safely risk without going bankrupt.

The next financial measure to be discussed is the current ratio. The current ratio is a
measure of how able a company is to pay its short-term liabilities with its short-term
assets, but does not take into account inventories from current cash (Investopedia). (cash,
receivables, etc.). The current ratio is considered slightly less accurate than the quick ratio,
which will be discussed next. A current ratio under one indicates that the company would
not be able to pay off its short-term liabilities if they came due immediately (Investopedia).
As with other financial measures, it is advisable to compare ratios between similar
industries rather different industries because ratios can vary greatly between industries
(Investopedia). BAMs current ratio this quarter is 1.192 (YCharts). Barnes & Noble current
ratio is 1.102 (YCharts). This would initially indicate that BAM is more able to pay off its
short term-liabilities than Barnes & Noble. A look at the companies quick ratios will be the
final determinant.

Similar to the current ratio, the quick ratio also demonstrates the ability of a
company to pay back its short-term liabilities with its most liquid assets (Investopedia).
The quick ratio differs from the current ratio in that it is considered a more conservative
(and more accurate) measure because it excludes inventories from current cash. The name
quick ratio derives its name from the ability to convert assets to cash to pay off liabilities
(Investopedia). BAMs quick ratio is 9% over the past year (NASDAQ). Barnes & Nobles
quick ratio is 37% (NASDAQ). In other words, Barnes & Noble has $1.37 of liquid assets
available to cover every $1 its short-term liabilities while BAM only has $1.09. This
indicates that Barnes & Noble, in fact, has more liquid assets available than BAM to pay off
its short-term liabilities (despite BAM having a higher current ratio).

Finally, the last financial measure to assess the health of a company is inventory
turnover. Inventory turnover demonstrates how often a companys inventory is replaced
over a specified period (Investopedia). With the other financial measures, a high or low
score is typically only good or only bad. In regards to inventory turnover, a high score can
be either positive or negative depending on the company and its situation. A high inventory
turnover ratio can indicate strong sales (moving inventory out of the store quickly) or
ineffective buying. A low ratio is generally considered bad as it indicates lackluster sales
and thus more leftover inventory (Investopedia). As with other financial measures,
inventory turnover levels should be compared between firms in similar industries as ratios
can vary greatly between industries. BAMs inventory turnover is currently at 0.30
(gurufocus). Barnes & Nobles inventory turnover is 2.9 (Bloomberg Business). This
measure indicates that Barnes & Noble is replacing its inventory quicker than BAM. As
aforementioned, this could indicate that Barnes & Noble has stronger sales than BAM
(plausible given that Barnes & Nobles net profit margin is +0.91% larger than BAM), but
could also indicate ineffective buying by Barnes & Noble.

The first recommendation for BAM would be to increase the companys net profit
margin to a positive percentage. BAMs current net profit margin (-3.35%) over the past
year indicates that the company is losing $0.03 for every dollar that it takes in. This net
profit margin is extremely poor, and the company cannot expect to operate efficiently for
long by taking on such heavy losses. A low net profit margin, as mentioned earlier, indicates
that a company is not using its resources or controlling its costs efficiently. Given that
BAMs asset turnover is stable (1.73%) and close to its competitors asset turnover ratio
(1.82%) it seems likely that the companys poor net profit margin is due to its inability to
control its costs rather than utilize its resources. This conclusion is further proven by
BAMs dismal OER, which was at -14.93% this past year. The costs of operating BAMs
properties is bleeding the company dry. In order to successfully compete with Barnes &
Noble and stay afloat, BAM must make controlling its costs a top priority.

A final recommendation for BAM is to address their inventory turnover ratio.
Barnes & Nobles inventory turnover (2.9%) is nearly 10 times higher than BAMs (0.30%).
It is unlikely that Barnes & Nobles high inventory turnover is a sign of ineffective buying
(as discussed earlier), but rather higher profits since the companys net profit margin is
0.91% higher than BAMs. BAMs low inventory turnover indicates that sales are lagging
which could in turn be a symptom of the companys extremely low OER and thus low net
profit margin. A low OER would ensue if BAM stores are unable to sell enough merchandise
to keep up with the costs of running the property, which appears to be the case. BAM must
move merchandise through their stores more quickly to help alleviate the problems with
the low OER, which could potentially have an effect on the companys net profit margin as
well.

BAM has both positive and negative aspects associated with its financials. The
companys high points come in its gross profit margin, upward-trending OPM, and strong
asset turnover. BAM is particularly struggling with its net profit margin, OER, and
inventory turnover as compared to its competitor. A very positive sign for BAM is that its
P/E ratio is at 14.38%, meaning that although the company has had some financial
difficulties, investors expect growth for the company in the future. Even better news for
BAM is that the companys P/E ratio is 19.94% higher than Barnes & Noble. It appears that
investors see considerable growth potential for BAM but little growth opportunities for
Barnes & Noble. If BAM can continue to impress its investors and remedy the financial
issues discussed, they can continue to be a competitive force in the book retail market.




Works Cited
Bloomberg Business. Barnes & Noble Inc. n.d. 2014 February.
<http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=
BKS>.
Business Wire. Books-A-Million, Inc. Announces Fourth Quarter and Annual Results . March
2013-27. 2014 Feb.
<http://www.businesswire.com/news/home/20130327006370/en/Books-A-
Million-Announces-Fourth-Quarter-Annual-Results#.UwYsIM3hPfI>.
Finance, Yahoo. Barnes & Noble Reports Fiscal 2013 Year-End Financial Results . 2013
25-June. 2014 February. <http://finance.yahoo.com/news/barnes-noble-
reports-fiscal-2013-123000545.html>.
Find the Company. Barnes & Noble (BKS) Income Statements. 2013 31-October. 2014
February. <http://income-statements.findthecompany.com/l/6611/Barnes-
And-Noble>.
Google Finance. Barnes & Noble, Inc. n.d. February 2014.
<https://www.google.com/finance?q=NYSE%3ABKS&fstype=ii&ei=wbMKU6ieN5D
0qAHG0gE>.
. Books-A-Million, Inc. n.d. February 2014.
<https://www.google.com/finance?fstype=ii&q=NASDAQ:BAMM>.
gurufocus. Books-A-Million, Inc. n.d. 2014 February.
<http://www.gurufocus.com/term/InventoryTurnover/BAMM/Inventory%2BTurn
over/Books-A-Million%2C%2BInc>.
Investopedia. Asset Turnover. n.d. 2014 February.
<http://www.investopedia.com/terms/a/assetturnover.asp>.
. Barnes & Noble Inc. NYSE: BKS. n.d. 2014 February.
<http://www.marketwatch.com/investing/Stock/BKS/profile>.
. Current Ratio. n.d. 2014 February.
<http://www.investopedia.com/terms/c/currentratio.asp>.
. Debt/Equity Ratio. n.d. 2014 February.
<http://www.investopedia.com/terms/d/debtequityratio.asp>.
. Gross Profit Margin. n.d. 2014 February.
<http://www.investopedia.com/terms/g/gross_profit_margin.asp>.
. Inventory Turnover. n.d. 2014 February.
<http://www.investopedia.com/terms/i/inventoryturnover.asp>.
. Operating Expense Ratio. n.d. February 2014.
<http://www.investopedia.com/terms/o/operating-expense-ratio.asp>.
. Operating Margin. n.d. 2014 Feb.
<http://www.investopedia.com/terms/o/operatingmargin.asp>.
. Price-Earnings Ratio. n.d. February 2014.
<http://www.investopedia.com/terms/p/price-earningsratio.asp>.
. Profit Margin. n.d. 2014 Feb.
<http://www.investopedia.com/terms/p/profitmargin.asp>.
. Quick Ratio. n.d. 2014 February.
<http://www.investopedia.com/terms/q/quickratio.asp>.
Market Watch. Barnes & Noble Inc. NYSE: BKS. n.d. 2014 February.
<http://www.marketwatch.com/investing/Stock/BKS/profile>.
. Books-A-Million Inc. NASDAQ: BAMM. n.d. 2014 February.
<http://www.marketwatch.com/investing/stock/bamm/profile>.
NASDAQ. BAMM Company Financials. n.d. 2014 February.
<http://www.nasdaq.com/symbol/bamm/financials?query=ratios>.
. BKS Company Financials. n.d. 2013 February.
<http://www.nasdaq.com/symbol/bks/financials?query=ratios>.
Wall Street Journal. Books-A-Million, Inc. Announces Fourth Quarter and Annual Results .
2013 27-March. 2014 Feb. <http://online.wsj.com/article/PR-CO-
20130327-912476.html>.
YCharts. Barnes & Noble (BKS) . n.d. 2014 February.
<http://ycharts.com/companies/BKS>.
. Barnes & Noble Current Ratio (Quarterly). n.d. 2014 February.
<http://ycharts.com/companies/BKS/current_ratio>.
. Barnes & Noble Debt to Equity Ratio (Quarterly). n.d. 2014 February.
<https://ycharts.com/companies/BKS/debt_equity_ratio>.
. Barnes & Noble Profit Margin (Quarterly). n.d. 2014 February.
<http://ycharts.com/companies/BKS/profit_margin>.
. Books-A-Million Current Ratio (Quarterly). n.d. 2014 February.
<https://ycharts.com/companies/BAMM/current_ratio>.
YCHarts. Books-A-Million Gross Profit Margin (Quarterly). n.d. 2014 February.
<http://ycharts.com/companies/BAMM/gross_profit_margin>.
. Books-A-Million Profit Margin (Quarterly). n.d. 2014 February.
<https://ycharts.com/companies/BAMM/profit_margin>.