Activists Poised to Rewrite Barnes & Noble Book in 2012

The New York-based company and its chairman Leonard Riggio spent 2011 warding off Liberty Media (LMCA) and other activist shareholders like Ron Burke-run Yucaipa Companies. Meanwhile, Barnes & Noble saw its profits evaporate into a $74 million 2011 loss. After reporting weaker than expected holiday sales and a grim 2012 outlook, the company said in January it would explore spinning off its promising Nook digital books unit, but the Nook may have its margins challenged by a Department of Justice lawsuit on eBook pricing.

Amid a chorus of gloom and doom about its bookstore model and falling profits, Barnes & Noble may be on the cusp of success with the eBook/tablet business model. It would be a dramatic turnaround after the company lost to Amazon in the online books market a decade ago.

"What is fascinating about Barnes & Noble and the new CEO William Lynch Lynch joined in 2010 is that they've come out with a product that has so far been successful against Amazon and Apple. That's remarkable," adds Tinker.

The nation's largest in-store bookseller saw its shares open 2012 within reach of all-time lows after it cut its sales and earnings outlook.

While Barnes & Noble ascribed a glowing outlook to its Nook-fueled BN.com business, which it expects to grow as much as 50% in 2012, it said that brick and mortar sales and its Barnes & Noble College businesses will achieve flat sales. Those projections led to a cut in its overall 2012 sales and earnings outlook, driving its earnings per share loss expectation as high as $1.40. The company has posted more than a 10% year-to-date loss, underperforming broader markets, even after a near- 20% Monday share surge to over $13 on the Jana Partners investment.

To appease wary shareholders, the company said it would consider a Nook spinoff that could unlock value for shareholders.

"We see substantial value in what we've built with our Nook business in only two years, and we believe it's the right time to investigate our options to unlock that value," said Lynch in January. That unit saw sales jump over 40% in the last nine-week holiday season, compared with 2010. In third quarter earnings, which showed declining profits, the company said it had built a 25% eBook market share. Lynch and Barnes & Noble have said little about how a spin would be executed.