Bloomberg News

Barnes & Noble Falls After Projecting Wider Full-Year Loss

January 05, 2012

(Updates with closing share price in second paragraph.)

Jan. 5 (Bloomberg) -- Barnes & Noble Inc., the largest U.S. bookstore chain, fell the most in four months after forecasting a wider annual loss than analysts projected and saying it may spin off the Nook e-reader business, its fastest-growing unit.

Barnes & Noble tumbled 17 percent to $11.24 at 4 p.m. in New York, for the largest decline since Aug. 19. The shares rose 2.3 percent last year.

The fiscal 2012 loss may be as much as $1.40 a share, the New York-based company said in a statement. The retailer previously forecast a loss of as much as 50 cents a share. The average estimate of six analysts was 59 cents.

Increased investing in the Nook business and lower-than- expected sales of its Nook Simple Touch device led to the lowered forecast, Barnes & Noble said. The company has been sacrificing profits to build its digital business as more consumers read electronic books.

The Nook business is “the one remaining growth driver for this company,” said Peter Wahlstrom, an analyst for Morningstar Investment Services in Chicago. “Now they’re talking about getting rid of that one growth driver. That changes the value of the business.”

Total sales of Nook devices surged 70 percent during the holiday-shopping period, according to the statement. Sales on a comparable basis in the Nook business, including digital content and hardware devices and accessories, rose 43 percent to $448 million during the nine-week period ended Dec. 31. Store sales rose 2.5 percent to $1.2 billion.

Investor ‘Drumbeat’

Since first offering the Nook in November 2009, the company has introduced three more devices as well as digital content and accessories. Sales in the Nook division may total $1.5 billion in the fiscal year ending April 30, the company said.

The performance of the Nook and calls from investors to increase shareholder value led to the decision to consider a spinoff, Chief Executive Officer William Lynch said in a telephone interview today.

“Talking to investors, we heard a drumbeat for this,” Lynch said. “We don’t feel the value of the asset is being reflected in the stock.”

Lynch declined to comment on when a decision on the Nook unit will be made or how a transaction might be structured.

The challenge for the retailer has been investing in a digital business that competes with Amazon.com Inc. and Apple Inc., which have much more money to spend on product development and talent, according to Michael Souers, a New York-based analyst for Standard & Poor’s. Amazon’s Kindle device, which was introduced in 2007, is the best-selling e-reader in the U.S., where the company sells the most digital books.

‘Tough Environment’

“Amazon really can afford to subsidize that part of their business and Barnes & Noble can’t,” Souers said. “It’s a really tough environment for them.”

Liberty Media Corp., controlled by billionaire John Malone, invested $204 million in Barnes & Noble in August after dropping its earlier bid to buy the bookseller. Barnes & Noble also gained customers after Borders Group Inc., once the second- largest U.S. book chain, sought bankruptcy protection and liquidated last year.

Earnings before interest, taxes, depreciation and amortization will be as much as $180 million for the fiscal year. The company previously projected as much as $250 million.

Revenue for the fiscal year will be as much as $7.2 billion, the company said. Souers projected $7.25 billion.

‘Red Flag’

“They’ve invested so much, and they couldn’t grow sales more than analysts were projecting,” Souers said. “That’s a red flag.”

Barnes & Noble plans to boost sales of the Nook and digital content by expanding overseas in the next two months, Lynch said. Discussions are being held with publishers, retailers and technology companies in international markets.

Comparable-store sales during the holidays at the chain’s more than 700 stores rose 3.4 percent. Revenue from physical books sold at stores increased 4 percent, the first sales growth in five years, according to the statement.

“That’s a positive, but that business is still dying a slow death,” Souers said.

That leaves investors hoping that the Nook business will continue to grow against better-financed competitors, Wahlstrom said. That environment and a reduction in its Ebitda forecast gives a spin off more credence because the company needs to raise capital to keep up with Amazon.

“They go against deep-pocketed companies,” Wahlstrom said. “It’s an uphill battle.”

--Editors: Robin Ajello, Kevin Orland

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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