A soft economy, slow store traffic and a short selling season have combined to make executives at the nation's largest bookstore chains reluctant to predict how book sales will do in the holiday season. Larry Zilvay, chief financial officer at Barnes & Noble, told analysts in a November 21 conference call discussing third-quarter results that "over the last few weeks, we have become progressively more cautious" about the prospects for the holidays. He noted that while September same-store sales were okay, the 0.6% increase in October was disappointing. He said that while he "would like to believe there will be a groundswell movement" toward books as gifts, the retail environment is so complicated this year that it is too difficult to predict fourth-quarter sales.

Zilvay did say that B&N's forecast of a 2%—3% increase in same-store sales at its superstores could be "difficult" (although not impossible) to hit. He added that even if the superstores "comped at zero," B&N's bookstore operations would still be able to earn $1.31 per share, due to cost-cutting initiatives. B&N has been cutting costs at the store level, at its distribution center and at headquarters, where a hiring freeze has been in place for several months. "We haven't cut to the bone... but we've taken a sharp pencil to expenses," Zilvay said.

Borders's CFO Ed Wilhelm said the shorter selling season, due to the late date of Thanksgiving, will make business more concentrated than ever "starting from December 15 right through Christmas Eve." A strong book lineup has Wilhelm "feeling pretty good about books," although he acknowledged that the actions of consumers is "the overriding factor" in determining how sales will play out. The company is forecasting fourth-quarter comparable-store sales at its superstores to range from a decline of 1% to an increase of 1%. Walden same-store sales are expected to fall 3%—5% in the quarter. But as at B&N, Wilhelm said that because of expense management, the company still expects full-year earnings to be in the $1.45—$1.49 per share range, even if spending remains cautious.

New Pick-up Service

Despite the likelihood that Borders will meet its earnings estimates, chairman Greg Josefowicz said he would like to see more top-line growth. To help meet that objective, Borders has signed a deal with Amazon.com that will allow customers to pick up books, music and movies that they have ordered online at a Borders superstore. Effective immediately, customers who buy a product from either the Amazon.com or Borders.com Web site will be given the location of up to 10 Borders stores where the item is in stock. Items ordered online will be sold at the Borders store price, with applicable local sales tax added, although customers will avoid shipping charges. Purchases are recorded as sales by Borders, with Amazon receiving a commission. Customers can return items purchased via the pick-up service to Borders, but Borders will not accept returns of titles shipped directly from Amazon. In a second initiative, Borders announced in the quarter that it had reached an agreement with Alibris to add its service to Borders's Title Sleuth service. Through its Web site, Alibris offers access to millions of used, hard-to-find and out-of-print books.

Books-A-Million CEO Clyde Anderson said the chain was "well stocked" for the holidays. In a conference call, Anderson reminded analysts of a now-entrenched trend—while the Thanksgiving weekend will be big, "it will be nothing like the last five days before Christmas." Despite Anderson's cautious optimism for holiday sales, BAM reiterated that because of weakness in consumer demand, the chain still expects fourth-quarter earnings to be below earlier estimates.

Riggio Talks Strategy

In discussing Barnes & Noble's growth strategy with analysts, company CEO Steve Riggio said B&N "is in the very early stages of a vertical integration that will further serve to differentiate us in the marketplace." Among the initiatives Riggio was referring to was the opening of the Reno, Nev., warehouse that has given B&N warehouses on both coasts. The decision to "self-distribute has paid off," Riggio said, by lowering the fees paid to wholesalers and by giving the company faster replenishment. B&N's proprietary publishing efforts continue to grow and will account for more than 4% of total revenues this year, Riggio said.

The growth of Barnes & Noble.com has also helped boost results at B&N. The company is "committed to a multichannel strategy," said Larry Zilvay, adding that B&N believes retailers "must offer [consumers] an integrated choice, not an outsourcing choice," a not-so-subtle dig at Borders's decision to have Amazon.com run its online operations. Its commitment to B&N.com notwithstanding, Zilvay said B&N has no plans to acquire majority control of the e-tailer. B&N's current B&N.com stock purchase program was a "reaction to a dramatic price-value gap," Zilvay explained.

Riggio also noted that with the success of its Readers' Advantage program, B&N is not just a bricks-and-clicks operation, but rather a bricks, clicks and direct-marketing operation. B&N will use the information from its more than two million Readers' Advantage members to launch target marketing efforts; 10 million e-mails will be sent to customers in November and December, Riggio said, and the company's 132-page holiday catalogue—its largest ever—has just been mailed.