A Dreary Tale for Barnes & Noble

The bookseller lowers its earnings outlook for 2007, citing discounted prices

Barnes & Noble (BKS) is bracing for disappointing profits this year, as the bookseller struggles to keep customers by lowering prices. Shares of the retailer tumbled 11.4% to $35.56 on Mar. 5, after the company trimmed its forecast for 2007 and plans to close an Internet distribution center.

Barnes & Noble is still expecting to announce in the coming weeks that it earned $2.20 to $2.30 per share during its fiscal year ended

Feb. 3. But now the New York company thinks it will then earn between $1.65 to $1.80 per share during its current fiscal year (ending January 2008). Analysts had forecast EPS of $2.41 for 2007, according to press reports.

“We have decided to reinvest a portion of our cash flow to reward our best customers by the recent lowering of prices to our Members,” CEO Stephen Riggio explained in a press release Mar. 5.

Barnes & Noble is fighting for business in an industry that doesn’t profit much on sales anyway. Tough rivals like Amazon (AMZN) and Borders (BGP) are putting on the heat to lower prices. On Oct. 24, Barnes & Noble announced that customers belonging to its Member program will get 40% off on hardcover bestsellers, 20% off other adult hardcovers, and an extra 10% off things like paperbacks, bargain books, children’s books, CDs, DVDs, and café items. When J.K. Rowling’s Harry Potter & the Deathly Hallows goes on sale on July 21, Barnes & Noble expects to sell the books at a deep discount.

The basic idea is that if you hype up a book like Potter and get people to line up at your stores on the day of its release, the crowds will end up buying more in general as a result. But Barnes & Noble thinks total sales will only be between $4.6 billion and $4.7 billion in 2007, increasing around 2% to 4% over 2006. Sales at stores open more than a year will be unchanged year over year or at best slightly positive.

Instead of raising prices, Riggio is trying to bolster profits by streamlining business operations. He’s going to close Barnes & Noble’s Internet distribution center located in Memphis, Tenn. in 2007. Instead, all the company’s Internet orders will be fulfilled from a new center in Monroe, N.J. and an existing facility in Reno, Nev.

Barnes & Noble is planing to report full-year 2006 earnings around Mar. 22. The company continues investigating its accounting of stock options, so its recently announced forecasts don’t include any changes that might be related to such issues.