Waterstones IPO would open new chapter for bookseller, says James Daunt

Standing among the piles of books being carefully arranged to attract passing shoppers in the Piccadilly branch of Waterstones in London, James Daunt is confident that this Christmas will be another cracker for his book shops. 

Before Daunt became managing director of the UK’s biggest bookseller over a decade ago, Christmas and January sales were the chain’s saviour, making enough money to cover losses incurred during every other month of the year.

Now, the stores make money every month of the year, even if Christmas is still an important bump. “It was a ‘pile high, sell it cheap’ sort of world. We don’t do that any more,” said Daunt, who is also chief executive of the much larger Barnes & Noble chain in the US. “But Christmas is still essential. And so far, on every 25th of December, Christmas has happened.”

The performance of the group — which, including Barnes & Noble, spans nearly 1,000 stores and generates close to $4bn in sales — is robust enough that Daunt has an eye on a stock exchange listing, saying it “would be a very sensible place” for the bookseller.

He last explored an IPO of Waterstones in 2018 ahead of its sale to private equity group Elliott but said that the timing was not right given the potential acquisition of Barnes & Noble, which Elliott bought the following year.

Both Waterstones and Barnes & Noble are adding scores of stores, defying predictions that the internet and Amazon would kill off the bookshop and a vindication of Elliott’s bet on the durability of bricks-and-mortar retail.

Daunt is one of the most powerful figures in the book industry, which has boomed in recent years as people returned to reading during the pandemic as an affordable pastime.

“In terms of the ownership of a business which is growing, but not now dramatically, I would have thought it would be in the public markets,” he said. “We will pay a very nice dividend for a pension fund-type investment rather than being in private equity.”

A workforce that “is extremely vocational and extremely committed” also lends itself to a “stable ownership focused on the medium to long term”, he added. 

One person familiar with Elliott’s plans said that there were no “near term plans to IPO but it was one of a number of options for the future”. Elliott declined to comment.

Daunt points to growth in the US as an attraction to investors. “The UK will grow a little bit, but in the US we have a completely different opportunity, which is much more exciting.”

Bookshops have disappeared from many US towns, Daunt said, and just by replacing those the chain could grow fast. “The contraction in the United States is so much more dramatic than it was in the UK, that there really is an opportunity.”

He has added close to 60 shops since taking over Barnes & Noble in 2019, and said that “they are all a success . . . people queue up on the opening day. It doesn’t matter whether we’re doing that in New York City or in the middle of nowhere.”

Barnes & Noble now operates about 620 shops and is planning to open 50 more across the US next year. The US group is expected to operate on similar margins as Waterstones this year, which would equate to about £400mn in profit from about £3bn in sales. “That’s why you can open up a lot of shops. Invest in your IT infrastructure and distribution. It’s a nice engine,” said Daunt.

In the UK, Waterstones has about 320 stores, and is opening about 10 more every year despite rising costs from wages, distribution and shipping. Over time, Daunt said he can see synergies from bringing together the back-office functions such as IT across Waterstones and Barnes & Noble.

He added that Waterstones typically grows revenue by about 2 or 3 per cent every year. Sales, which fell during the pandemic but rebounded strongly after, are roughly 9 per cent higher than in 2019. 

If it returns to its expected long-term trend this year, the business should make £50mn-60mn in earnings on revenue of about £350mn of sales.

Daunt got his start in the industry when he founded an eponymous independent bookshop chain based in London in the 1990s, after a brief career at JPMorgan as an investment banker.

His personal ownership of the now seven-strong Daunt Books, which is the second largest independent chain in the UK, in addition to the Waterstones role means he controls the majority of independent high street book sales in the UK outside supermarkets and retailers such as WHSmith, although these are still dwarfed by Amazon. Under Elliott’s ownership, Waterstones has since bought other major rivals Foyles and Blackwell’s, giving him even more influence.

“This is quite a large sort of market segment with one player,” he admits.

Daunt favours a hands-off approach when it comes to his retail empire, preferring to trust local shop managers to know how to sell books on their high streets.

It was a strategy he deployed when he took over Waterstones in 2011 after banks seized control of the struggling chain from retailer HMV. The turnaround also involved stripping out head office costs and cutting back on products not linked to books and the more intellectual world of Waterstones such as gifts and stationery — “all of the cushions. I was very, very suspicious of anything that involves fabric.”

Even pricing changes depending on the shop — people living in affluent Hampstead can expect to pay more for certain books than those in Doncaster, for example.

The launch of Amazon’s Kindle proved challenging for the chain — sending sales of physical books sharply lower — but Daunt took the counterintuitive stance of stocking the electronic devices in store. 

Daunt said that he has applied the principles that helped restore Waterstones’ fortunes to Barnes & Noble. When selling books, “there are more differences within the countries than there are between the countries,” he said.

While he provides “principles” about how shops should loosely look, store managers are allowed to use their own creativity and judgment when it comes to tempting Christmas shoppers with their displays.

“You know what Waterstones is. I don’t need to spend billions making it look the same,” he said.