Wednesday, February 23, 2011

At Barnes & Noble, Sales Rise, Profits Fall, Dividend Is Suspended and Shares Are Punished

Barnes & Noble's third quarter results, reported this morning, show the trickiness of navigating this transitional retailing (and etailing) climate. Following their best holiday period in years, sales rose 7 percent and profits were within the company's own guidance.
Both measures were below analysts' expectations, though, with profits down from a year ago, and the company is suspending its quarterly dividend of twenty-five cents per share. The dividend reduction was expected long ago, since the company is investing in its digital strategy and has been financing the dividend through borrowings rather than earnings. But the combination of lower earnings and no quarterly payout sparked a sell-off in shares this morning, trading down about 9 percent as we prepared this dispatch.

Making things more opaque, BN has "decided not to issue sales or earnings guidance for the balance of fiscal 2011" (never a good move), blaming "the potential short-term impact" that Borders' stores liquidations "may have in the marketplace." In a conference call with investors, ceo William Lynch said "the team has been looking at some of those [closing Borders] locations" and "a minority of them appear attractive to us" and could be taken over by BN. Mitchell Klipper added that "there's a handful of [Borders] stores we're looking at." Lynch also emphasized that "we have no plans to close stores beyond the nominal figures we've previously disclosed."

The other item that stands out from the quarterly report is BN's assertion that they "now sell twice as many ebooks as we do physical books at" Sales at were up 53 percent or $110 million, at $319.4 million for the period--but those sales yielded the lowest return of any of their business segments, with gross margin of only 9.5 percent and negative EBIDTA of $50.5 million.
In the investor call, Lynch said they believe they "grew our share of the ebook market another 3 to 4 points" for "approximately 25 percent of the overall US market for ebooks"--which had been their goal for 2014. CFO Joe Lombardi wouldn't be pinned down on when the investment costs in Nook would diminish so that returns could rise, though he said "you can expect losses to minimize greatly as we go into the next fiscal year." Lynch added that "we don't need to gain any market share for this to be a profitable business for us."

Overall sales for the quarter totaled $2.325 billion, up seven percent from $2.174 billion a year ago, with superstore comp sales up 7.3 percent, thanks to Nook sales and their expanded toys & games offerings. And not books. As the Lombardi reiterated, "obviously physical book sales have declined and are declining." Total superstore sales were $1.465 billion in the quarter.

The college stores, which were supposed to even out the company's performance, actually fell 2.2 percent on a same-store basis. EBITDA for the quarter was $170.1 million, and net income was $60.6 million--within the company's predicted range, but more than 10 percent below what analysts were expecting. And all profit measures--in all three of the company's business segments--declined measurably from a year ago.


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