Friday, April 25, 2008

Barnes & Noble Gift Card Keeps Giving and Giving to Chairman Riggio

Leonard Riggio is widely known as a visionary in the bookselling industry, having acquired the flagship Barnes & Noble, Inc (BKS-$31.98) bookstore in 1971 and building it into the largest specialty book retailer in the United States. The company operates 798 stores in 50 U.S. states, with retail store sales of $4.6 billion in FY 2007 (ended February 2, 2008).

Mr. Riggio is a brilliant entrepreneur, helping to resurrect GameStop Corp (GME-$55.97), the largest video game retailer in the world, from Chapter 11 reorganization in November 1996.

Riggio, who beneficially owns approximately 27.6% and 8.6% of the common stock of BKS and GME, respectively, is a savvy marketer, too—of his own self-interests.

What you become directly influences what you get ~ Motivational speaker E James Rohn

In addition to earning more than $1.0 million and approximately $460,000 per annum as Chairman of BKS and a director of GME, respectively, Riggio earns millions more per year from other relationships and transactions, according to a BKS filing Thursday with the Securities and Exchange Commission.

  • Riggio is the principal beneficial owner of MBS Textbook Exchange, Inc (MBS), which is the largest used textbook wholesaler, bookstore systems provider in the U.S, distributing new and used textbooks to more than 4,000 colleges and universities nationwide.

BKS purchases textbooks directly from MBS, with aggregate purchases of $7.5 million and $6.9 million for FY 2007 and FY 2006, respectively.

  • Since 1965, he has been CEO and the principal stockholder of Barnes & Noble College Booksellers, Inc, the scholastic sister company of BKS, operating more than 600 college and university campus bookstores across the United States and in Canada. In addition, BKS operates, a college campus-focused online retailer, owned by Riggio, too.

Money, its a gas.
Grab that cash with both hands and make a stash.
New car, caviar, four star daydream,
Think I'll buy me a football team.

Pursuant to license agreements, BKS pays a royalty on Internet sales realized by from the sale of books designated as college textbooks. The income stream to was $4.9 million and $3.9 million for fiscal years 2007 and 2006, respectively.

Money, get back.
Im all right jack keep your hands off of my stack.
Money, its a hit.
Dont give me that do goody good bullsh-t.
Im in the high-fidelity first class traveling set
And I think I need a lear jet.
~ Pink Floyd ("Money" / Dark Side of the Moon)

And, speaking of jets…

  • B&N College leases a jet aircraft to BKS, receiving payments of $1.9 million and $1.7 million during FY 2007and FY 2006, respectively.

  • Riggio owns a majority interest in office/warehouse space leased to BKS.

Aggregate lease payments paid by BKS totaled $5.4 million and $5.3 million for FY 2007 and FY 2006, respectively.

  • Leonard Riggio is an investor in Scopia Management Inc, which owns a 10.5% interest in Source Interlink Companies, Inc (SORC-$1.46), a leading distributor/ rackjobber and publisher of entertainment products and publications.

BKS uses Source Interlink as its primary supplier of music and DVD/video, as well as magazines and newspapers. BKS paid Source Interlink $438.2 million and $442.7 million for merchandise during FY 2007 and FY 2006, respectively.

The 21.9% drop in the share-price of BKS reflects investor concern about the adverse impact to forward sales and EPS guidance, resulting from the projected slowdown in consumer spending.

Given his sizeable holdings in BKS, Leonard Riggio, 67, illustrates the importance of managing investment risk exposure through diversification across asset classes. He owns a portfolio of companies that range all the way from textbooks to jets and real estate.

Unfortunately, Riggio epitomizes the grip retired founders can maintain on their companies. The poor corporate governance at BKS speaks to the problem of fealty to Riggio by the Board of Directors . Mr. Riggio, leveraging his links to BKS and the Board, continues to build his stack of riches while common stockholders suffer.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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