Disappointing Earnings Forecast Hammers B&N Shares

by Jim Milliot, PW Daily -- Publishers Weekly, 3/5/2007

Lower prices for its club members combined with deep discounting for Harry Potter and the Deathly Hallows caused Barnes & Noble to forecast earnings projections for the current fiscal year that were well below analysts' expectations. The company said it expects earnings per share to be in the $1.65 to $1.80 range; an analysts' survey by Thomson Financial had called for earnings per share to be about $2.41. The announcement caused B&N's stock price to tumble in early trading this morning.

For the year ended Feb. 3, 2007, sales at B&N's superstores rose 2%, to $4.5 billion, although same-store sales were off 0.3%. B&N opened 32 stores in the year and closed 18. Dalton sales fell 29% for the year, to $102 million, due to a combination of a 6.1% decline in same-store sales and store closings. Comparable-store sales at B&N.com fell 1.1% in the year, to $433 million.

Commenting on last year's results, CEO Steve Riggio noted that while sales were at the low end of projections, the company's earnings came in as expected. "The negative impact of the disappointing sales was offset by an increase in gross margin, attributable to fewer bestseller markdowns, lower inventory shrinkage and improvements throughout our supply chain," Riggio said.

In the current year, superstore sales are projected to increase between 2% and 4%, to $4.6 and $4.7 billion, with same store sales flat to slightly positive. Although Hallows will spike sales in the second quarter, the discount on the title will limit any earnings benefit. In addition, the retailer's new loyalty program, introduced this fall, is adding members and sales faster than expected, but unit gains have not yet offset the impact of additional discounts, depressing margins. Riggio said that while the new program will have a negative impact on revenue and gross margins in the short term, "we believe that it is the right move for us at this time."

The company also said it plans to open between 30 to 40 new stores this year, and will close its Internet fulfillment center in Memphis, consolidating its operations in its new New Jersey warehouse.