Barnes & Noble posts 1Q loss on sales slump, legal costs related to proxy fight, cuts guidance

By Emily Fredrix, AP
Tuesday, August 24, 2010

Barnes & Noble posts 1Q loss, cuts annual guidance

NEW YORK — Barnes & Noble Inc. posted a first-quarter loss on legal expenses related to its proxy fight with billionaire financier Ron Burkle and cut its annual earnings outlook on costs related to the fight.

The results missed expectations and shares fell on Tuesday. But the struggling book seller reported it was making inroads with its online bookstore and e-book reader Nook. Some analysts said that was a sign of optimism as the company can make up for falling sales in retail stores online.

“If you have a situation where losses on the print side are being more than made up for on the digital side, that’s not a good thing. That’s a miracle,” said Michael Norris, senior trade analyst at Simba Information.

The largest U.S. traditional book seller said it lost $62.5 million, or $1.12 per share, in quarter ending July 31. Last year during the same period it earned $12.3 million, or 21 cents per share.

Revenue rose 21 percent to $1.4 billion, although the cost of sales rose as the company invested more in its online book store and Nook e-reader.

Analysts expected a loss of 80 cents on revenue of $1.4 billion, according to Thomson Reuters.

Shares fell 34 cents, or 2.3 percent, to $14.66 Tuesday.

The company, based in New York, said it has now has a larger share of the digital book market than its 17 percent share of physical books. Barnes & Noble said one-quarter of Nook customers are new to Barnes & Noble’s website, and people with Nooks have increased their spending by about 20 percent.

Electronic books are a small but fast-growing part of the book market.

CEO William Lynch said he expects the share gains to continue throughout the holidays and beyond. The company is rebranding all of its digital reading efforts around the Nook so that “Nook equals digital reading from Barnes & Noble to consumers,” he told investors on a conference call.

The company plans to spend $140 million this year to boost its digital presence and market its Nook and is staying on target with its spending, said Morningstar analyst Peter Wahlstrom.

“Management seems to be acting pretty prudently given a challenging environment,” he said.

Executives declined to comment about the company’s surprise announcement earlier this month that it was exploring options that include putting itself up for sale. They also did not speak about the proxy fight with billionaire financier Ron Burkle, who wants to increase his stake in the company.

The company has been fighting Burkle and his Yucaipa Cos. investment firm, which has about a 19 percent stake in the company. Burkle unsuccessfully sued Barnes & Noble in a bid to expand his stake even more without triggering a shareholder rights plan. Such plans, commonly called a “poison pill,” are designed to prevent hostile takeovers. When that lawsuit was dismissed, Burkle said he would nominate a slate of three directors to the company’s board. The annual shareholder meeting is Sept. 28.

Barnes & Noble said its pretax legal expenses in the quarter were $9.5 million or 11 cents per share.

The company cut its full-year guidance by 25 cents per share, now expecting a loss to range from 25 cents to 65 cents per share. Excluding the costs, it expects to break even or lose as much as 40 cents per share.

The book seller’s shares have fallen more than 20 percent since the beginning of the year as the industry copes with Americans spending less on books and other discretionary items during the economic downturn, and shifting their spending online and into digital readers.

Revenue at Barnes & rose 42 percent to $145 million in the quarter, although revenue in stores fell 2 percent to $1 billion.

Smaller rival Borders Group Inc. reports second-quarter results Sept. 1.

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