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Barnes & Noble: A besieged giant


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<span style="font-size:19.5pt;"><font face="Verdana">Barnes & Noble: A besieged giant</font></span>

<span style="font-size:10.5pt;"><b><font face="Verdana">The world's largest bookseller faces an unwelcome stock fight while trying to deal with radical market shifts.</font></b></span>

<span style="font-size:7.5pt;"><b><font face="Tahoma">By Andrea Chang</font></b></span>

<span style="font-size:9pt;"><font face="Verdana">The story line for bookstore giant Barnes & Noble Inc. is growing ever more dramatic, with falling store sales, increasingly stiff competition and a fierce battle over the company's shares led by a billionaire Los Angeles investor.

Barnes & Noble changed the face of book retailing in the 1990s with its aggressive rollout of hundreds of superstores nationwide. Today, the New York company sells about 300 million books a year and accounts for roughly 18% of U.S. book sales, making it the world's largest bookseller.

But its fortunes may be changing after years as the undisputed king of books. That vulnerability has attracted the attention of Ron Burkle, a shrewd businessman and Democratic fundraiser who built his fortune buying and selling supermarket chains but is better known for his friendships with politicians such as Bill Clinton and Hollywood celebrities.

For months Burkle, 57, has been in the midst of a high-profile buying spree that has included big investments in beleaguered luxury retailer Barneys New York and recession-hit upscale grocer Whole Foods Market Inc.

But it's his zeal for Barnes & Noble that has taken the spotlight as he publicly challenges the family that has controlled the book chain for nearly four decades.

Although Barnes & Noble faces few rivals in the brick-and-mortar bookstore business, analysts say consumers today have more book-buying avenues than ever, with online sellers, general merchandisers, discounters and wholesale clubs offering growing selections at low prices. The company was also late to enter the digital e-reader realm with its Nook device, which now must play catch-up to Amazon.com Inc.'s Kindle.

"Whether it's television, Internet, Wal-Mart, Amazon or an e-reader, there's always, it seems, a new attack on traditional book reading and buying in bookstores," said David Schick, an analyst at Stifel, Nicolaus & Co. "It's just one thing after another."

Since late last year, Burkle has been aggressively buying Barnes & Noble's shares, prompting the company's board of directors in November to adopt a shareholder rights plan, or "poison pill," designed to thwart hostile takeover attempts.

That sparked an increasingly heated fight that has pitted two strong-willed businessmen against each other: Barnes & Noble Chairman Leonard Riggio, who bought Barnes & Noble as a single bookstore in 1971 and is often credited with creating the modern bookstore model, and Burkle, whose fortune is estimated at $3.2 billion.

Burkle's latest move to double his stake to 37%, which would make him the company's largest shareholder, has been met with staunch opposition from Riggio and other company insiders, who own about 31%.

In recent letters to Barnes & Noble's board, the supermarket magnate called the company's stock undervalued and slammed the board for rejecting his request to allow his investment firm, Yucaipa Cos., to raise its stake without triggering the poison pill provisions.

"I believe that once again this board has chosen to protect the personal interests of the Riggio family over the interests of the company's public shareholders," he wrote Feb. 25.

In an interview with The Times, Steve Riggio, Barnes & Noble's chief executive and Leonard Riggio's younger brother, declined to discuss Burkle but said the company was confident in its future and well-positioned to take advantage of the changing nature of selling books.

"Our retail business is a bulwark; it's a solid foundation from which we can reach customers," he said, adding that all of the company's divisions continue to grow market share. "We can understand analysts' concerns about the future of it, but we think that they overstate the impact of competitive pressures far too much."

Yet Barnes & Noble's business, especially in its stores, has been far from robust in recent years.

For the quarter that ended Jan. 30, store sales fell 4.7% to $1.4 billion and sales at stores open at least 15 months fell 5.5%. Although online sales were up 32%, spurred by the launch of the Nook, profit declined and the company gave a disappointing outlook for its current quarter.

The pullback in store sales is due in part to readers such as Jessica Holloway, who used to shop regularly at traditional bookstores before migrating online to Amazon. Since October, after buying a Kindle, the publicist from Studio City has been almost exclusively reading digital content.

"For a while I thought I would miss the touch of a book and flipping pages, but it's actually a lot better," she said. "To be honest, the only books I actually read are the leftover ones that I bought before my Kindle."

And that fundamental shift in reading and book-buying habits has some analysts doubtful that an increased Burkle presence would mean a turnaround for the company.

"Barnes & Noble is swimming against a very strong current," said Matthew Fassler, managing director at Goldman Sachs. "I'm not sure what his, or anyone else's, gaining additional control would remedy for the business. I think that the essence of the problem is a bit beyond management's control."

Although Burkle has not spelled out his broader strategy for Barnes & Noble and declined to comment, industry watchers speculate that his intention is to buy big and reap the rewards when the company's outlook improves, especially if there are further closures and consolidation in the bookstore industry. Barnes & Noble operates 719 stores in 50 states as well as college bookstores and online and publishing divisions.

Burkle's strategy is "when the assets are in the down part of a cycle, to get involved," said BB&T Capital Markets analyst Andrew Wolf. "He invests and then gets out."

Indeed, Burkle has said that his general philosophy is to buy reputable-but-troubled companies for cheap. Some of his best-known deals involved supermarket chains Ralphs and Food4Less.

But Burkle's foray into books could prove to be more challenging than dealing with regional grocery stores, Wolf said.

"I'm a little less able to draw conclusions about what the end game would be with a national chain like Barnes & Noble," he said.

Despite Burkle's criticism of company management, Barnes & Noble executives defended the company's business model and said the rise of e-readers doesn't preclude the success of traditional bookstores.

"Physical books and bookstores will continue to be a very important part of this big industry," said William Lynch, president of Barnes & Noble.com. "Anyone that says the physical book business is going away is just not paying attention or just doesn't know much about the industry."

At a Barnes & Noble store in Pasadena recently, Maura Duval Griffin was reading a children's book to her 2-year-old daughter, Adrienne. The music supervisor from Eagle Rock said that, even though she was "very, very tempted" to buy an e-reader, she felt the appeal of physical books couldn't be replicated.

"I love the smell of bookstores, and I love the smell of books," she said. "There's nothing that beats the in-store experience."

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<span style="font-size:7.5pt;"><b><font face="Tahoma">http://www.latimes.com/business/la-fi-barnes-noble12-2010mar12,0,6198360.story?track=rss</font></b></span></p>

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