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Earnings Calls: 
Barnes & Noble Earnings Call, Second Quarter 2008
Author: Albena Toncheva
123jump.com
Last Update: 6:34 AM ET September 23 2008

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The bookseller saw a 15% drop in second-quarter profit and double-digit declines in sales of music. The online business grew 13.9%, excluding the effect of Harry Potter. Sales dropped 1.6% to $1.22 billion, down from $1.24 billion a year ago, while same-store sales fell 4.7%. Barnes & Noble expects same-store sales to drop in the low single digits for the year. The company reiterated its full-year earnings guidance of $1.70 to $1.90 per share.


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This is a summary of the second quarter fiscal 2008 earnings call conducted by Barnes & Noble, Inc. (BKS) on August 21, 2008.

Management:
Chief Financial Officer: Joseph J. Lombardi
Vice Chairman of the Board and CEO: Stephen Riggio

Key Investor Issues:

- The company earned $15.4 million, or 27 cents per share in the quarter versus $18.05 million, or 26 cents per share, a year earlier.
- The bookseller saw a 15% drop in second-quarter profit and double-digit declines in sales of music. The online business grew 13.9%, excluding the effect of Harry Potter.
- Sales dropped 1.6% to $1.22 billion, down from $1.24 billion a year ago, while same-store sales fell 4.7%.
- Barnes & Noble expects same-store sales to drop in the low single digits for the year. The company reiterated its full-year earnings guidance of $1.70 to $1.90 per share.

Second Quarter Highlights:

The results for the quarter were impacted by the comparison against last year’s record breaking sales of Harry Potter and The Deathly Hallows.

Last year in the second quarter Barnes & Noble had a 4.4% comparable store sales increase a 17.9% comparable increase online and a total sales increase of 7.6%. This year consolidated sales totaled $1,224,000,000 for the quarter, a 1.6% decrease over last year’s 7.6% increase.

Sales at Barnes & Noble stores were $1,090,000,000 for the quarter, down 1.6% over a year ago.

Comparable store sales have declined 4.7% for the quarter which was in line with guidance which called for a decrease in the low to mid single digits. Excluding the impact from the Harry Potter book, comparable store sales decreased 1.5%.

In the second quarter the company opened 10 Barnes & Noble stores and closed four and at quarter end total store count of 703.

The company closed 10 more B. Dalton stores in the quarter resulting in a total B. Dalton store count of 73. Sales at BarnesAndNoble.com were $99.8 million for the quarter a 3.6% comparable sales increase on top of last year’s 17.9% increase. Excluding the sales impact of Harry Potter last year, online sales increased 13.9% for the quarter.

Gross margins improved 150 basis points in the second quarter.

Last year’s gross margins included sales of the highly discounted Harry Potter book. In addition, Barnes & Noble had a benefit in the second quarter from its physical inventory shortage results which were more favorable than previously estimated and accrued. In fact, the shortage results this year were the lowest in the company’s history. As a result, the company had an after tax benefit of $0.12 per share this quarter or a 90 basis improvement on the gross margin line.

Typically in a quarter where comparable store sales decline gross margins are pressured as the company is unable to leverage occupancy costs. However, even though Barnes & Noble had 4.7% comparable store sales decline, the company was able to offset much of the planned deleveraging for two primary reasons:
- greater throughput and usage of the distribution centers;
- reduced markdowns as a percentage of sales.

Greater volume from DCs enables Barnes & Noble to lower its distribution costs per unit and purchase books at higher margins.

In addition, as a result of certain changes to the promotional strategies, markdowns have declined year-over-year on an apples-to-apples basis without the Harry Potter discount last year.

Selling and administrative expenses increased 40 basis points this year as a result of the negative comparable store sales.

In absolute dollars, selling and administrative expenses declined year-over-year due to tight expense controls as Barnes & Noble manages through current sales trends. The company reported net income per share of $0.27 for the quarter. Excluding the $0.12 benefit from the inventory shortage, the company reported earnings per share of $0.15 higher than the company’s guidance of $0.08 to $0.13 per share.

Inventories declined 1.9% this quarter in line with the 1.5% comparable stores decline excluding Harry Potter.

The company has borrowings of $119 million at quarter end or $93 million net of cash largely as a result of the share repurchase activity in the first quarter.

Guidance
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