Barnes & Noble's Earnings Rise Slightly, but Profits Fall

It has been a tumultuous year for Barnes & Noble (BKS), the country's largest bookseller. The company has been through proxy fights and poison pills, has been put up for sale -- with no deal visible on the horizon -- and has seen further erosion in the chain bookstore business model. Selling masses upon masses of printed books in bricks-and-mortar stores nationwide, as it has done for the past two decades, isn't an easy way to turn a profit anymore.

B&N's earnings report for its second quarter, which ended Oct. 30, is particularly indicative of the complexities inherent in trying to adapt to an increasing digital market while also trying to hang on to what allowed the company to grow so large, both in size and in importance for the publishing industry.

Overall, total sales for the second quarter were $1.9 billion, which included $798 million in revenue generated by the company's College division, which was folded into B&N proper in August 2009 in a deal that has generated a number of ongoing lawsuits. Taking out the College earnings, B&N sales increased by 1% from the same period last year, but that overall number is still a little less than the $1.98 billion in revenue analysts had predicted.

More telling is B&N's reported net loss for the quarter, which was $12.6 million, or $0.22 a share, as compared to the $23.9 million the company lost 12 months earlier. B&N's net loss is technically within the guidance issued by the company in their last quarterly report, which ranged from a gain of $0.05 a share to a loss of $0.25 a share, but analysts were expecting a smaller net loss of $0.08 a share. B&N also reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $46 million, and comparable store sales suffered a 3.3% decline overall, and a 1.1% decline at its B&N College stores.

The Future Is Nooks and Toys

But there was better news on the online side, as well as from toys and games, continuing an earlier trend. BN.com comparable sales increased 59%, largely attributable to the growth in digital products like the Nook e-reader and its more expensive cousin, NookColor, which B&N claims has become "the single bestselling product" for the company since its Nov. 16 release. The company reported a 42% sales increase in its toys and games department during the second quarter, and now that it's testing out an expanded "toy-store-within-a-store" model in select stores, further sales increases on the toys and games side are expected in 2011.

In a statement, CEO William Lynch noted, as he has in the past, that B&N has "quickly captured" 20% of the digital book market. And the rest of his remarks were focused entirely around digital content: "Based upon the double-digit comparable store sales achieved over the past weekend, we are further convinced that eReaders and accessories will be a key holiday gift item and driver of holiday sales this year, leading to accelerating eContent sales in the quarters and years ahead. We're continuing to invest in this opportunity to build the most expansive catalog of digital content available for sale, the best reading software on the market, and devices that deliver the most innovative digital reading experiences."

Looking ahead, B&N says it expects to continue investing heavily in digital initiatives related to its Nook line, investments which will peak during the second half of the year, then increase moderately going forward. But the company expects those investments to start reaping returns in the third quarter, as customers snap up more NookColor's and start buying content for the devices. That's also in line with company expectations that comparable sales online and in stores will rise during the holiday season: a 75% increase online for the third quarter and the year, and 5% to 7% in the third quarter for bricks-and-mortar stores. Already during the Thanksgiving holiday, in-store comparable sales jumped 17.2%, while online sales rose 105.7% compared to the 2009 holiday.

B&N says it expects to achieve EBITDA of approximately $160 million to $190 million and $170 million to $205 million, for the third quarter and the full year, respectively. Third quarter earnings per share are expected to be in a range of $0.90 to $1.20. Full-year fiscal 2011 losses per share are expected to be in a range of $0.75 to $1.15.

Unsurprisingly, the markets weren't pleased with B&N's results: Shares dropped down 4.2%, in premarket trading Tuesday, then plummeted to $12.27 at market open, down 14%. While the price recovered a bit later in the morning, shares were still in the neighborhood of $13.50, down around 9%.