Most of the articles written about Ron Burkle and Barnes & Noble are nothing but spitball speculation. The writer interviews some stock analysts who know nothing about Burkle and prints what they say. But a couple articles give us a glimpse into Burkle’s mind.
The first is an article called “Burkle’s Books” written by James Covert in the New York Post on August 6th. Covert writes: “While Barnes & Noble’s stock has taken a beating on fears the nation’s No. 1 book chain is losing the battle over e-books, sources close to Burkle say the savvy retail tycoon has dismissed such fears as overblown – and dwarfed by the opportunity to cut costs.”
The last part of that sentence is telling. Most of what is written about Burkle and Barnes & Noble has focused on the huge changes caused by e-books.
Reports that include talk of Amazon buying Barnes & Noble are unbelievable. Reports that include talk of cost cuts, like this one, are very believable. They don’t sound like something a source would fantasize about. They sound like something Burkle would think about.
Covert goes on to write: “People close to the situation said Burkle sees an opportunity to reverse recent losses by slashing spending at the retailer, in large part by halting store growth and slowing capital improvements.”
The first part of that sentence makes little sense. Barnes & Noble is no longer adding to its overall store count. In the last few years, it did open several stores. But it closed even more. Today, there are almost the same number of Barnes & Noble stores there were 3 years ago.
However, Burkle might want to stop opening new stores altogether. Closures could then bring the store count down faster. If Barnes & Noble stopped opening new stores and continued to close stores at the same rate it has over the last 5 years, it would cut its store count by 2% a year.
The part about slowing capital improvements makes more sense. However, the capital improvements Barnes & Noble announced this year are focused on the e-book business. I doubt Burkle wants to cut those. So, while there may be operating efficiencies to squeeze out, the promise of freeing up a lot of cash by spending less on building new stores and improving old ones is limited.
Finally, the Post quoted one source as saying: “For Burkle, it’s all about the proper use of capital. If you manage it properly and do the right thing, you could get back the price you paid for the company within three or four years.”
That makes it sound like Burkle thinks Barnes & Noble is cheap compared to its current cash generating ability. That’s true. Or it could be, if the company was willing to skimp. But how long will that last? Will the transition to e-books come so fast the stores dry up before Burkle can milk them for cash?
That’s the risk Burkle is taking.
Another article that gives us a glimpse into Burkle’s brain was published in BusinessWeek back in March. It’s called “The Other Ron Burkle.”
In it, Burkle is quoted as saying: “I don’t pay attention to how I feel about anything. What I like or use is irrelevant…I know I’m not in consumers’ heads. I don’t know what’s going on in America. I know what people in New York and Beverly Hills think…but I don’t know what people anywhere else think.”
That’s a common problem for all investors. Burkle tries to overcome it through research: “Before investing in Barnes & Noble, Burkle and his team asked publishers, book agents, consumers, and tech companies the same question: In the era of the e-book, what good is a bookstore? What Burkle learned was that Barnes & Noble has a deep and abiding relationship with its customers and could do a lot more to exploit it.”
According to Judge Strine’s poison pill trial opinion: “Burkle’s chief suggestion, which he referred to as ‘the thesis’ for Yucaipa’s investment, was that Barnes & Noble should somehow form a partnership with a technology company, such as HP. Burkle thought HP would be interested in a quality retail partner like Barnes & Noble as a way to rival Apple’s dominance in consumer electronics. And, such a partnership would give Barnes & Noble an edge in competing with the likes of Amazon.com, whose e-book reader, the Kindle, had beaten Barnes & Noble’s e-book reader, the Nook, to the market.”
There are a few interesting points there. One is that Burkle does not come off as just being interested in milking the existing stores for cash. He sounds like he’s interested in making changes at Barnes & Noble, and in fighting for the e-book market.
Personally, I think the idea of teaming up with a consumer electronics company makes a lot of sense. I don’t have much faith in the ability of a book retailer to develop multiple generations of an e-book reader without wasting tons of cash in expensive investments and missteps. Trying to get some other company, who happens to know a lot more about hardware than you do, to bear the burden makes sense. I don’t have high hopes for companies making profits on the hard side of the e-book business anyway. In the long-run, the soft side will be the more consistently profitable space. But tech companies seem interested in chasing the hard side of the business.
Burkle seemed to be proposing that a company like HP should be given the chance to use some of Barnes & Noble’s in-store retail space. That’s something the HP brand needs. And it’s something HP probably wouldn’t succeed in doing well on its own. A partnership like that might make sense. Would it work? Who knows? But it does tells us how Burkle thinks about Barnes & Noble.
Burkle took the idea far. In fact, Burkle told two members of Barnes & Noble’s board that he spoke with a top executive at HP about “things (HP) could do with Barnes & Noble”. And Burkle suggested the board might want to add that HP executive to the Barnes & Noble board.
Burkle’s focus on e-reader technology comes through repeatedly. For instance, Aletheia’s Peter Eichler said: “Burkle and he discussed some specifics, such as Burkle’s view that Barnes & Noble was a ‘cheap stock’, that Riggio had initially discouraged Burkle from purchasing Barnes & Noble stock, and Burkle’s belief that Barnes & Noble could be a leader of developing e-reader technology.”
Of course, the point about Barnes & Noble being a “cheap stock”, is probably what most attracted Burkle to Barnes & Noble in the first place. In his interview with BusinessWeek, Burkle described Yucaipa’s approach to investing: “We always try to buy companies that are doing O.K. but that have some issues. We buy at a price that if they just muddle through, we don't go broke. And if they do better, we make a lot.”
That’s a good description of what Burkle normally looks for. As for what specifically attracted him to Barnes & Noble, the way he described the weekend strategy session he held with Yucaipa employees during the 2008 stock market crash, sums up how he saw Barnes & Noble: “Everybody was afraid the world was coming to an end. I wasn’t. This is an opportunity. We can buy phenomenal companies and brands at ridiculous prices.”
And that’s what Burkle sees in Barnes & Noble: a phenomenal brand at a ridiculous price.
Disclosure: Author owns shares of Barnes & Noble (BKS)
This is the fourth article in Geoff Gannon's ongoing series covering the Barnes & Noble proxy fight. For additional background read Why Would Anyone Buy Barnes & Noble Stock at $15 a Share?, Who is Ron Burkle? Why Does He Want to Control Barnes & Noble? And How Does He Know Charlie Munger?, and Who Will Win the Barnes & Noble (BKS) Proxy Fight? Ron Burkle? Or Len Riggio?
Look for the fifth article in Geoff Gannon's ongoing Barnes & Noble series tomorrow.