Booking An Uncertain Future

By Greg Sushinsky | May 26, 2009 AAA

Although Barnes & Noble (NYSE:BKS) posted a loss for its recently ended quarter, it raised its outlook for 2009 - this in the face of both the consumer pullback in spending and questions surrounding the bookselling business going forward. The stock had a mild spurt as the market liked the news, so let's look at whether the view for the remainder of the year is justified, and what might be in store beyond that.

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Sales Down, Losses Up Slightly
Revenue fell 4% to $1.11 billion at Barnes & Noble, while the company expects sales for the full year to decline by 3-5 percent, a negative sales trend that has continued across several quarters. Income for the quarter was a loss of $2.7 million, down from $2.2 million in the same quarter last year. This equates to a 5 cents per share loss for the quarter versus a 4 cents loss for last year's same quarter. Excluding charges for discontinued operations, the loss came to 4 cents per share versus 15 cents per share for last year's same quarter.

Outlook Raised Despite Online Sales Struggles
Barnes & Noble raised its outlook to a range of $1.10 to $1.40 earnings per share for the year, up from its previous outlook of 95 cents to $1.25. The company cited its purchase of ebook company Fictionwise, which is expected to add to Barnes & Noble's digital/online sales. Yet Barnes & Noble has struggled with its online business, as consumers buy books and music from Amazon.com (Nasdaq:AMZN) and other online retailers. Amazon, by contrast, is not beholden to the narrow categories of books and music, as its robust earnings and continued growth clearly demonstrate. The retailing concept of books and music lodged within a brick-and-mortar model is one that has been handed down from long before the internet, ebooks or Kindle.

Meanwhile Borders Group (NYSE:BGP), once the twin bookseller competing with Barnes & Noble, had the musical chairs tune of economic recession stop when it was out of its seat, fully flushed with debt and marketing problems. As a result, it has been fighting for survival the last several years. The stock, which has been trading between 34 cents and $8.02 per share in the last 52 weeks, avoided delisting by the New York Stock Exchange. The company has been emblematic of the larger troubles hanging over the bookselling business. (For more on delisting, see The Dirt On Delisting.)

Publishing Problems
The always uneasy fusion of art and commerce in the book business is under assault in recent news articles. Layoffs, shrinkage and cutbacks in traditional book publishing companies such as News Corp's (Nasdaq:NWS) HarperCollins and other well-known names in the industry are part of the ongoing landscape. For those who wish to connect the publishing dots, News Corp's other major print business is newspapers (remember them?) - suggesting that this is a print phenomenon, a potential long-term sea change, not merely a downturn in book publishing mimicking the general economic recession. This is not alarmist but merely a reasonable observation. The hyper-speed changes in information technology are ultimately pressing against, not for, the book publishing and buying business. So, will skittish users one day demand eagerly to hook up with the the ultra-condensed version of "War and Peace" on Twitter, if they even know what "War and Peace" is?

Internet Solutions?
Books-A-Million (Nasdaq:BAMM), another bookseller that began as a brick-and-mortar dinosaur (if I may sacrilegiously so designate physical bookstores) but has shown strong sales as an etailer, has a super-partner in the online selling game - Wal-Mart (NYSE:WMT). Even more than Amazon, Wal-Mart has its feet solidly and widely planted in the retail turf, where the company's economy of scale may easily allow it this foray into online and e-book selling, or wherever that adventure shall lead it. (For more, see Choosing The Winners In The Click-And-Mortar Game.)

Barnes & Noble Stock
The health of what amounts to stand-alone, or nearly alone, booksellers such as Borders and even Barnes & Noble (though admittedly not immediately for Barnes & Noble) has to concern any investor. While Barnes & Noble's earnings seem good for this year, what then? The earnings reports of booksellers and publishing companies routinely include the phrase denoting books as "nonessential items", words that wound any serious reader or writer. When you combine that with the permanent micro-nizing of the newspaper business and the shrinkage of future print media as a whole, this is not mere change or evolution. It is a complete reformulation of a centuries-old industry and the business that comes with it.

Bottom Line
So, if you buy the stock of any bookseller such as Barnes & Noble, do so with a very short-term horizon of quarters and perhaps a couple of years. In the book business, there is only the cloudiest of futures beyond that.

To learn more, see The Industry Handbook: The Retailing Industry.

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