Barnes & Noble: What Is to Be Done?

On a day off, I’m finally catching up and catching my breath on the ongoing saga at Barnes & Noble.

For those unapprised, the retailer’s latest CEO, Demos Parneros, was promptly and unceremoniously fired without severance in July, little more than a year into his tenure as B&N’s CEO. The company’s explanation of his departure was fairly ominous, citing “violations of the Company’s policies,” but not “due to any disagreement with the Company regarding its financial reporting, policies, or practices or any potential fraud relating thereto.” Given the sudden firing without any warning signs, and the political and social climate and continued incidence of sexual harassment and abuse from individuals in positions of power, one was left to infer whether his firing was a precaution taken against the #metoo movement.

When Parneros was hired in 2017, he was the 4th CEO hired by B&N since 2013. While Parneros was an outsider, spending most of his career at Staples, he had spent the previous 5 months as B&N’s COO under the former CEO Ron Boire, a retail executive with similar big-box credentials (Sears, Best Buy, Toys R Us, KMart).

Parneros’ was tasked with stemming B&N’s sales decline and improving traffic at B&N stores: lofty, but somewhat typical objectives for a retail executive. In early interviews and press conferences, Parneros cited complementary products like educational toys and gifts as key to turning around the stores. In addition, he was encouraged by the different experimental business models deployed in B&N’s ‘concept’ stores – stores with smaller formats, or restaurants-cum-bookstores like the short lived B&N Kitchen concept (covered previously here.)

B&N’s founder, chairman, and largest shareholder, Len Riggio was enthusiastic about Parneros’ potential: “It has become abundantly clear over the last five months that Demos is a perfect fit for our company and an outstanding choice for Chief Executive Officer. I believe Demos is fully prepared to help foster a new era of growth for Barnes & Noble.”

Unfortunately, the marriage between Riggio and Parneros was far from a success, as outlined in the contentious defamation lawsuit Parneros has brought against B&N following his expulsion. According to the filings, B&N was in late stage proceedings to be sold, a surprising divulgence that was previously unknown. After the buyer rescinded its offer for B&N, potentially as a result of concerning diligence findings, the relationship between Parneros and the hands-on Riggio soured, creating an untenable working relationship between the two leaders. The lawsuit details Riggio’s hands-on and active management of the company, creating minimal maneuverability and a difficult working environment for any CEO. The lawsuit goes further, describing Riggio’s “erratic and unprofessional behavior” and citing specific cases that create a portrait of Riggio as “volatile,” “refusing to relinquish control,” and deeply critical of many of the management surrounding him.

B&N’s response to the lawsuit wholly rejected Parneros’ lawsuit assertions, and placed the responsibility for his firing squarely on his own shoulders. In a brusque, blunt statement, B&N likened Parneros’ lawsuit to extortion, and pointed to “sexual harassment, bullying behavior and other violations of company policies” as the reasons behind his departure, citing detailed episodes from Parneros’ tenure of wrongheaded if not malicious behavior. The statement also took the unusual step of defending Riggio’s actions as described in the lawsuit, and claiming Parneros’ suit was “replete with lies and mischaracterizations.”

Regardless of the ultimate truth in this public spat, which likely contains elements of truth on both sides, B&N is in the incredibly unenviable position of trying to find a new CEO for the business, its fifth in so many years. In the interim, B&N will continue to be led by a triumvirate of B&N executives: Allen Lindstrom, CFO; Tim Mantel, chief merchandising officer; and Carl Hauch, v-p, stores. Missing from this group is Riggio himself, who “remains B&N executive chairman and will be involved in its management,” per B&N.

In an environment when book sales continue to fall, with audiobooks continuing to eat up overall share, and eCommerce (Amazon) continuing to eat up the world, the ongoing executive mismanagement of Barnes & Noble seems like an unforced error of epic proportions. In Publishers Weekly, publishing executives  anonymously expressed disappointment in Parneros’ departure, and the broader and continued instability at B&N. They were encouraged by the early stages of Parneros’ restructuring plans for the chain, including investment in supply chain improvement, a continued downsizing of its retail stores, and broader cost cutting initiatives to enable B&N to continue to compete effectively.

It will be interesting to see how B&N moves forward from this latest episode. One interesting development to keep an eye out for is an outright sale. Many believe that the offer for B&N was made by Indigo, a successful and ambitious Canadian bookseller who has recently expanded its footprint into the United States. Another possibility is Books-a-Million, the second largest US bookseller and a private company. In either case, given the late stage at which the prospective buyer pulled out, it’s unlikely that they will return to the negotiating table to attempt another acquisition unless things take a significant turn for the worse.

In my mind, it’s hard to imagine a suitor for B&N that wasn’t already invested in the bookselling industry. Major players in the retail industry are already beleaguered enough without having to take on B&N and the relatively-needy publishing industry. Amazon is a possibility, but given their modest bookstore ambitious and recent acquisition of Whole Foods, I think it would be an unlikely one.

In the financial markets, an investor named Richard Schottenfeld of the eponymous Schottenfeld Management announced an increase in his ownership stake in B&N to 7% today. With this stake, Schottenfeld joins the ranks of Riggio (12% ownership) and other institutional  investors (Blackrock – 10%, Dimensional Fund Advisors – 8%, Vanguard – 7%).

To complement his purchase, Schottenfeld took the relatively unusual step of providing a rationale for his investment in the related filing. Schottenfeld mentions that he is in discussions with Riggio and B&N management to help spur “changes in company leadership at the executive and board level, implementation of operational improvements,” thereby to increase the “desirability of selling the company.” Sounding eerily reminiscent of Parneros’ introductory musings, in the filing Schottenfeld advocated for a focus on toys and games and less on music and DVDs, driving “higher value” from the cafes, and “enhancement to the experiential aspect of the stores.”

As he further outlines, he believes that “the company represents an attractive acquisition target,” somewhat ridiculously citing the disclosure of the attempted purchase in Parneros’ lawsuit as an “encourag[ing]” sign of other potential suitors for the company. Schottenfeld “encourage[s] the Company to continue in its efforts to explore and seriously consider all available sale transaction opportunities.” Whether there is anything more behind this thesis than provided in the filing is up for debate.

In response to this news, $BKS is up ~12% today.

Meanwhile, B&N just reported its first quarter sales, reporting a 7% sales decline and an $16M operating loss for the quarter, both results more or less in line with the previous year’s results.