Barnes & Noble Falls After Forecasting Possible Loss on E-Book Investments

Barnes & Noble Inc., the largest U.S. bookstore chain, fell the most in 19 months after forecasting a possible loss for the fiscal year because of a $140 million investment in its digital book unit.

For fiscal 2011, Barnes & Noble projected breakeven to a loss of 40 cents a share, according to a statement yesterday. Analysts on average had forecast a profit. Cash flow from operations won’t be generated this year because of money invested in its digital book strategy and store improvements, the New York-based company said today on a conference call.

“The market is concerned on their investments in digital technologies next year,” said Michael Souers, a New York-based analyst with Standard & Poor’s, who recommends holding the shares. “It’s hard to know how long it’s going to take to monetize the investment.”

Barnes & Noble declined $2.79, or 17 percent, to $13.62 at 2:52 p.m. in New York Stock Exchange composite trading, after falling as much as 18 percent for the biggest intraday drop since November 2008. The shares lost 14 percent this year before today.

Market Share

Barnes & Noble has been trying to offset declining sales at its bookstores by investing in its digital book reader, the Nook, and applications to sell e-books. The company said today that its market share of digital books grew to 20 percent from 2 percent since releasing the Nook in November.

“The management team here is extremely excited that right after launching an e-reader we are capturing this kind of sales growth,” Joseph Lombardi, chief financial officer, said in a telephone interview yesterday.

The retailer expects U.S. sales of trade books to increase 17 percent to $27 billion by 2014 and for digital titles to rise to more than 20 percent of that, from less than 5 percent now. U.S. digital book sales tripled last year to $313.2 million, as the total market declined 1.8 percent to $23.9 billion.

Barnes & Noble cited the growth of its online business, which includes digital books, to reinforce the need for its investment. The unit’s revenue rose 51 percent to $141 million in the fourth quarter ended May 1.

Online revenue will increase 75 percent to $1 billion this year, the company said. Barnes & Noble doesn’t provide sales figures for digital books or its Nook reader.

‘Most Explosive’

“Digital publishing and digital book selling will soon become the most explosive development in the history of our industry and will sweep aside those who aren’t participating,” Leonard Riggio, the company’s founder and chairman, said during the presentation.

The increase in digital sales will cause a drop in revenue from paper books and prompt the company to close as many as 10 Barnes & Noble stores each of the next three years, he said.

Barnes & Noble, which operates 720 bookstores and 637 college locations, said it expects online revenue to make up 31 percent of the company’s total by 2014, increasing from 10 percent now. Digital books have a 20 percent profit margin, compared with 30 percent for paper books sold in stores, the retailer said.

“The market is also trying to digest the margin impact,” said Souers, who today changed his annual per-share earnings estimate for the company to a loss of 12 cents from profit of 92 cents. “If they do grow sales and continue to gain share, that will have an impact on earnings down the road.”

Excluding some items, the fourth-quarter loss was 89 cents a share, the company said yesterday. Analysts predicted a loss of 81 cents, the average of five estimates compiled by Bloomberg. The net loss widened to $32 million, or 58 cents a share, from $2.69 million, or 5 cents, a year earlier.

The retailer’s college bookstores, purchased last year, accounted for 50 cents of the loss, including 15 cents from interest costs, Lombardi said. The February-through-April timeframe is generally a loss in the College Bookstore business.

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

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