Insights

Microsoft/Barnes & Noble Joint Venture: Winning proposition for both companies

BY Marianne Wilson

On Monday, Barnes & Noble Inc. and Microsoft announced a strategic partnership in a new unnamed Barnes & Noble subsidiary that, for the time being, is being identified as Newco. Here some comments from retail consultant Maggie Gilliam (Gilliam Insights) on the new venture:

One of the first benefits will be the introduction of a NOOK app for Windows 8 that will extend the immense Barnes & Noble digital bookstore to hundreds of millions of Windows customers worldwide. To date, NOOK has been only domestic. In addition, the NOOK study software will be available on the Microsoft platform for distribution and management of digital educational materials.

It is evident that both Microsoft and Barnes & Noble see new vistas opening in the world of eReading in the form of compelling customer experiences, but neither side is disclosing much at this time. The words interactive and multimedia came out during the conference call, and we can dream about new applications of Microsoft’s Kinect technology, for starters. In any event, Microsoft claims to have a lot to add to eReading besides being a platform provider. And the joint venture gives takes Microsoft into the eReader and eBook world with a library and degree of expertise that both Apple and Google are trying to achieve.

In forming Newco, Barnes & Noble has unleashed some shareholder value—the stock opened up 88.5% on the announcement—but the market clearly isn’t appreciating the company fully. After reaching an intraday high of $26, the stock closed at $20.66, up 51%, where the market value totals $1.2 billion, or less than the company’s 82.6% share in Newco estimated at $1.4 billion. (Editor’s note: Figures are for Monday, April 30.)

Thus, the market is giving negative value to the company’s profitable bookstores, which should not be written off. They are not just important in the sale of eReaders, but for future physical eCommerce, whose success we believe very strongly lies in multiple channels that enable consumers to purchase when, where and how they choose.

Moreover, a good interactive experience at the store level can be a profound contributor to sales success. Apple has demonstrated that stores can be a valuable asset. And Barnes & Noble is succeeding in making its stores family gathering places with dedicated educational play areas for kids. Moreover, stores are the biggest differentiators from Amazon.

Microsoft has its Microsoftstore.com and has opened 18 stores with two more coming this spring. They seem to be doing well, but unlike Apple, Microsoft does not have a list of blockbuster consumer products. On the other hand, Microsoft can sell a broad range of its customers’ products and offer an interesting selection. Barnes & Noble has 700 stores, many in prime locations, and while neither company is making any commitment, possibilities here could be interesting.

We think this JV could be a winning proposition for both companies.


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Ascena gains access to plus-size market with Charming Shoppes buy

BY CSA STAFF

SUFFERN, N.Y. — The Ascena Retail Group will acquire Charming Shoppes Inc., parent company of Lane Bryant, for about $890 million.

The move gives Ascena — which owns the Dressbarn, Maurices and Justice chains — entry to the steadily-growing large-size women’s clothing market. In addition to Lane Bryant, Charming Shoppes also owns the Fashion Bug and Catherines Plus Sizes banners. It operates more than 1,800 stores nationwide. In 2011, nearly 85% of Charming Shoppes’ sales involved plus-sized apparel.

Upon completion of the deal, which has been approved by both boards, Charming Shoppes, which is based in Bensalem, Pa., will become a subsidiary of Ascena.

“Charming Shoppes is a superb strategic fit for Ascena,” said David R. Jaffe, president and CEO, Suffern, N.Y., which operates more than 2,500 stores. “Over the past few years, we have welcomed into our family new brands and new team members while delivering increasing value to shareholders. We believe that Charming Shoppes will be no exception.”

Charming Shoppes announced last December that it was examining alternatives for the company.

“In addition to partnering with a buyer that can support the future growth and development of our businesses, the $7.35 per share consideration represents a premium of 25% to the closing market price of Charming Shoppes common stock on May 1, 2012,” Michael Goldstein, board chairman of Charming Shoppes, said in a statement. “We are confident that this transaction is in the best interests of our shareholders.”

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CVS raises guidance on solid Q1 performance

BY CSA STAFF

WOONSOCKET, R.I. — CVS Caremark’s president and CEO Larry Merlo told analysts Wednesday morning that he was “very pleased” with its first quarter, as results across both the retail and pharmacy benefit management segments came in at the high end of expectations and its integrated assets continue to demonstrate success and improve patient lives.

“Overall, this was a terrific quarter with strong results across the board, including our cash generation,” Merlo told analysts. During the quarter, the company generated $4.2 billion in free cash flow.

During the first quarter ended March 31, CVS Caremark achieved the expected benefit of 3 cents per share from Walgreens’ battle with Express Scripts. Should the impasse between Walgreens and Express Scripts remain unresolved, CVS Caremark will report the estimated impact on a quarter-by-quarter basis throughout the year. For the second quarter, it is projecting a benefit of 3 cents to 4 cents per share, should the situation remain unresolved.

“The benefit is expected to be slightly higher than the first quarter, primarily driven by greater operating efficiency in our pharmacies, and we’ll also see a full quarter’s run rate of ESI script volumes that transferred throughout the first quarter, as well as a modest ramp in the front-store benefit from these new customers,” Merlo said.

In light of this, as well as its solid first-quarter performance, CVS Caremark raised its earnings guidance for the full year 2012. The company raised full-year adjusted earnings per share to $3.23 to $3.33, with both ends of the range up 5 cents from its guidance issued earlier this year.

Revenues in the pharmacy services segment rose 32.3% to $18.3 billion during the quarter. In turning to the retail business, same-store sales rose 8.4%. Pharmacy same-store sales rose 9.8%, while front-end same-store sales rose 5.3%. Revenues in the retail pharmacy segment increased 9.9% to $16 billion during the quarter.

“Overall, I am very pleased with our front-store sales this quarter. We saw increased customer traffic and a slightly higher average ticket. Our ExtraCare loyalty program continues to be a key differentiator for us. We’ve had the program in place for well over a decade, and now with 69 million active cardholders, we continue to find new ways to enhance the offering. As an example, our ExtraCare Beauty Club already boasts more than 12 million members and is helping to drive sales across the beauty business,” Merlo told analysts.

Net revenues during the quarter increased 19.9% to $30.8 billion. Net income attributed to CVS Caremark totaled $776 million, or 59 cents per diluted share, compared with $713 million, or 52 cents per diluted share, in the year-ago period.

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