Barnes & Noble Sinks Most Since June After Halting Dividend

Barnes & Noble Inc., the largest U.S. bookstore chain, declined 14 percent for the largest drop in almost eight months after suspending its dividend to conserve cash and invest in electronic books.

Barnes & Noble previously offered an annual dividend of $1 a share. The New York-based retailer also said today that it will stop giving forecasts for the rest of fiscal year until more is known about Borders Group Inc., which filed for bankruptcy last week.

Both booksellers have lost customers as more people choose to read books online or via portable digital readers such as Amazon.com Inc.’s Kindle, which dominates the market. Barnes & Noble had already sacrificed profits over the past year to invest in its digital strategy, losing $14.5 million in the nine months through January.

“There’s still an uphill battle from the physical side of the business,” said Peter Wahlstrom, an analyst for Morningstar Investment Services in Chicago. The retailer also faces increasing costs for the rollout of its digital content unit, he said.

Barnes & Noble sank $2.67 to $15.94 at 4:01 p.m. today in New York Stock Exchange composite trading, the largest decline since June 29.

The suspension of the dividend will add about $60 million of cash per year to the company’s balance sheet. That will be used to invest in its digital business and possibly takeover locations left vacant by Borders, Chief Executive Officer William Lynch said on a conference call with analysts.

Photographer: Jonathan Fickies/Bloomberg

Pedestrians pass a Barnes & Noble store as customers upstairs wait in line for a book signing in New York. Close

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Photographer: Jonathan Fickies/Bloomberg

Pedestrians pass a Barnes & Noble store as customers upstairs wait in line for a book signing in New York.

Net Income

Net income in the quarter ended Jan. 29 fell to $60.6 million, or $1 a share, from $80.4 million, or $1.38, a year earlier, the retailer said. Analysts anticipated $1.13, the average of five estimates compiled by Bloomberg.

Barnes & Noble also posted its first gain in same-store sales since 2007, a week after Ann Arbor, Michigan-based Borders filed for bankruptcy. The chain was quicker than Borders to embrace e-books, and the Nook reader is helping the company boost revenue. Sales at stores open at least a year rose 7.3 percent.

In August Barnes & Noble put itself up for sale. The company didn’t give any update on the process in the statement. The bookseller likely won’t buy Borders because the chain doesn’t have an appealing digital reading business or much attractive real estate, according to Wahlstrom.

Barnes & Noble’s spending has helped the chain narrow the gap with Amazon.com, which released its Kindle digital book reader in 2007, two years before the Nook’s debut and about three years prior to Borders selling its first e-book.

Kindle’s Share

The Kindle has a market share of 67 percent in the U.S., followed by the Nook at 22 percent, according to Goldman Sachs Group Inc. Amazon.com also generates 58 percent of e-book sales, followed by Barnes & Noble’s 27 percent, Apple Inc. at 9 percent and Borders with 7 percent.

Barnes & Noble is trying to shrink Amazon.com’s lead by marketing the Nook at its college bookstore unit, acquired in 2009. The company last year released free software geared to textbook reading that lets students highlight and add notes.

The company also has said the release of a color version of the Nook in November will boost sales of digital magazines, children’s books and cookbooks because those genres rely more on color pictures. Amazon.com doesn’t sell a color Kindle.

Digital content will account for $400 million in revenue this fiscal year, the company has said. That would amount to 5.6 percent of the $7.1 billion in annual sales expected by analysts.

Digital Strategy

The chain also views its stores as a key to the digital business and an advantage over competitors. The majority of Nooks are sold in its more than 700 superstores. The company has leveraged that by building boutiques in its best-performing 100 locations to demonstrate the Nook and sell accessories such as device covers for as much as $60.

Sales of e-books in the U.S. last year more than doubled to $441.3 million from $169.5 million, according to the Association of Publishers. Digital titles made up 8.3 percent of all trade book sales, up from 3.2 percent in 2009. Revenue from printed trade books, which don’t include educational or professional titles, fell 5.1 percent to $4.9 billion last year.

While Barnes & Noble has a brighter future than Borders, the chain has “a long road ahead” before it becomes highly profitable, said Michael Souers, an analyst for Standard & Poor’s in New York.

“They aren’t out of the woods either,” Souers said in an interview before today’s results. “It still remains to be seen how competitive Barnes & Noble will be with e-books.” He recommends holding the shares.

To contact the reporter on this story: Matthew 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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