Barnes & Noble Likely To Avoid The Recycle Bin

By Ryan C. Fuhrmann | September 01, 2011 AAA

Bookstore operator and Nook eReader provider Barnes & Noble (NYSE:BKS) reported first quarter losses that were worse than analysts expected. However, Nook sales jumped significantly and suggest the company is successfully competing with technology rivals in the battle over digital book content and related reading devices. Its business model remains in flux, but Barnes & Noble is increasing the likelihood that it doesn't follow its erstwhile archrival into the recycle bin.

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First Quarter Recap
Sales improved a modest 2% to $1.4 billion. The increase was due to a 37% jump in online sales to $198 million. In this category, Nook electronic reader sales jumped, as did related digital book content. However, bookstore sales fell 3% and continued to make up the bulk of the total top line at $1 billion. Comparable store sales fell 1.6%. The remaining operating segment saw sales at Barnes & Noble's college bookstore locations fall 2% to $220 million. Management detailed that Nook and online digital content sales that occurred from both online and bookstore avenues, jumped 140% to $277 million.

Lower sales costs sent gross profit up 10% to $387.6 million, but SG&A expenses, related to spending to support development of the Nook and related digital content, rose nearly 8% to $411.1 million. This combined with depreciation expense, which fell 2% to $55.7 million, resulted in an operating loss of $79.2 million. This was down slightly from a loss of $87.6 million in last year's first quarter, but is demonstrating that Barnes & Noble is not profitable in its current form. Net income came in at a negative $56.6 million, or a loss of 99 cents per diluted share. (For related reading, see Understanding The Income Statement.)

Barnes & Noble's business is seasonal, which means quarterly losses are not necessarily indicative of its results over a full fiscal year. However, it projects a loss of 10 cents to 50 cents for the full year on sales of $7.4 billion. This would represent year-over-year top line growth of 6% on continued jumps in online sales and Nook-related revenue.

The Bottom Line
Barnes & Noble also detailed that it expects an additional $150 million to $200 million in sales from the demise of archrival Borders. But even with this boost and strong Nook-related sales, it doesn't expect to be profitable. Management didn't provide cash flow details for the quarter in its earnings release, so it remains to be seen if it is generating positive operating cash flow as it spends to migrate away from its traditional bookstores. (For more on cash flow, see The Essentials Of Corporate Cash Flow.)

Investors should take comfort in the fact that Barnes & Noble is succeeding in competing against Amazon's (Nasdaq:AMZN) Kindle device, Sony's (NYSE:SNE) eReader and more general table computers from the likes of Apple's (Nasdaq:AAPL) iPad and Research in Motion's (Nasdaq:RIMM) Blackberry device. It is also working to have more control over content and could outcompete these purer technology rivals given its knowledge of the inner-workings of the publishing industry.

However, it remains to be seen how fast digital sales ramp and offset what are likely to be increasingly difficult trends at the bookstores going forward. As such, prospective investors may want to wait on the sidelines until cash flow trends are clearer.

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