Barnes & Noble Education, Inc. (BNED): A Bull Case Theory

Yahoo

18-03-2025

We came across a bullish thesis on Barnes & Noble Education, Inc. (BNED) on Substack by Catapult Capital. In this article, we will summarize the bulls' thesis on BNED. Barnes & Noble Education, Inc. (BNED)'s share was trading at $9.73 as of March 17th.
An aerial view of a well-stocked bookstore, with customers browsing inside.
Barnes & Noble Education (BNED) is the independent university bookstore division of Barnes & Noble, spun off in 2015. Initially seen as a more stable business compared to mainstream retail, BNED operates 1,164 bookstores across the U.S., with 649 physical and 515 virtual locations. The company primarily sells branded merchandise and textbooks and has historically faced headwinds from e-commerce competition, digitalization, and piracy. The textbook retail market has shifted toward an oligopoly, with BNED controlling about 30%, its main competitor Follett also holding 30%, and the remaining share split between self-managed stores and smaller operators. Over time, self-managed bookstores have ceded share to BNED and Follett, consolidating the industry further.
Despite expectations of resilience, BNED's performance post-IPO has been disastrous. Amazon and other e-commerce players have aggressively encroached on BNED's core textbook sales, while digitalization has enabled publishers to sell directly to students, bypassing bookstores. Rampant piracy has further eroded the market, impacting both BNED and textbook publishers. However, salvation has come in the form of "Equitable Access" (EA) programs, designed to address affordability concerns for lower-income students. These programs shift textbook purchasing to an opt-out model, bundling textbook fees with tuition and dramatically increasing sell-through rates—from roughly 35% under the old model to nearly 80% at campuses adopting EA. Universities benefit from higher textbook sales, students receive materials at a discount, and publishers see stronger profitability despite offering price reductions. This shift mirrors the transition of the music industry to subscription-based streaming, where higher volume offsets lower per-unit revenue.
BNED launched its own EA programs—First Day (FD) and First Day Complete (FDC)—in 2021. The rollout has been highly successful, with 16.4% of its covered campuses now enrolled in FDC. While overall revenue has remained stable due to the cannibalization of traditional textbook sales and store closures, margins have surged, transforming BNED's financial outlook. The company has shifted from breakeven EBITDA in FY23 to posting 4.7% trailing-12-month EBITDA margins, a testament to the program's impact. At this point, the key question is not whether FDC will succeed, but how much market penetration BNED can achieve—20%, 30%, or even 70%?
The company faced a major overhang in early 2024 when the Biden administration's Department of Education (DOE) launched an investigation into the opt-out nature of EA programs, questioning whether students were overpaying. At the same time, BNED was highly leveraged due to industry headwinds and failed acquisitions, with significant debt maturing in mid-2024. The DOE probe created uncertainty, making lenders hesitant to refinance. BNED was forced into a dilutive rights offering, sold a large stake at a discount to Immersion Corp (IMMR), and converted second-lien debt from Fanatics and VitalSource into equity. As a result, IMMR became the de facto controlling shareholder, with an initial 40% stake that has since been reduced to 32% through additional share issuances aimed at further deleveraging.
In December 2024, the DOE investigation concluded without action, as universities defended the benefits of EA programs. With this regulatory risk resolved, BNED now finds itself at the early stages of an FDC rollout that is fundamentally reshaping its profitability. The leverage issue is in the past, the company is generating strong cash flow, and its competitive position is solid in an oligopolistic market.
Valuation remains the key opportunity. Despite these fundamental improvements, BNED trades at just ~5x EV/EBITDA on trailing numbers. However, as FDC penetration continues rising, profitability is set to increase further. If we assign a modest 14x multiple on forward unlevered earnings, factoring in conservative EBITDA growth and normalized capex, the stock could be valued at $23.3. The current setup presents a compelling opportunity—BNED is a transformed business, in a resilient market, with its largest regulatory overhang resolved. As the market fully realizes the implications of BNED's shift to EA programs, the stock has significant upside potential.
Barnes & Noble Education, Inc. (BNED) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 17 hedge fund portfolios held BNED at the end of the fourth quarter which was 6 in the previous quarter. While we acknowledge the risk and potential of BNED as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BNED but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.