B&N Reports: Operating in Soft Retail Environment

B&N reported slack sales typical of many retailers this morning and even excluding the huge impact of Harry Potter in the comparable quarter numbers were down versus last year. Here is their press statement:

Sales for the second quarter decreased 1.6% to $1.2 billion largely due to last year’s record sales of J.K. Rowling’s Harry Potter and the Deathly Hallows. Barnes & Noble store sales decreased 1.6% to $1.1 billion, with comparable store sales decreasing 4.7% for the quarter. Barnes & Noble.com sales were $99.8 million for the quarter, a 3.6% comparable sales increase. Excluding prior year sales of the Harry Potter book, comparable sales decreased 1.5% in stores and increased 13.9% online. Bestselling titles during the quarter included Stephenie Meyer’s Breaking Dawn, Randy Pausch’s The Last Lecture, Lauren Weisberger’s Chasing Harry Winston and David Wroblewski’s The Story of Edgar Sawtelle. Second quarter net earnings were $15.4 million or $0.27 per share. Included in second quarter net earnings was an after tax benefit of $0.12 per share, resulting from a more favorable physical inventory shortage rate than previously estimated and accrued. Excluding this benefit, second quarter net earnings were $0.15 per share, higher than guidance of $0.08 to $0.13 per share. Despite the softer sales environment, the company’s management of operating expenses and higher than forecasted gross margins enabled it to exceed its second quarter earnings per share guidance. Gross margin was stronger than expected due to greater utilization of the company’s distribution centers and a lower markdown rate.

Other points from the conference call:

• Last year for the same period comp store increase of 4.4% and online increase of 17.9% for a total sales increase of 7.6%
• This year 1.6% decrease versus last years 7.6%.
• Excluding Harry Potter effect same store sales declined 1.5% this quarter
• Opened 10 and and closed 4 B&N stores for 723 total. Continued to close Dalton stores for a total of 73.
• Sales at B&N.com were $99.8mm for the quarter up 3.6% on top of last years 17.9% increase. The company noted that excluding HP sales at B&N.com were up 13.9% and this quarter was the 7 straight quarter of increased sales.
• Gross margins were up 150 basis points as a result of less highly discounted HP books and an significant quarterly improvement in stock shrinkage. (after tax benefit of 12cents per share)
• Guidance: The company is lowering its full year comp sales to slightly below 1%. Keeping EPS at previously issued guidance based on improved financial performance.

The company may have got off easily on the question period. No one asked about the recent resignation of Marie Toulantis (CEO of B&N.com) especially in light of the continued performance gain. Riggio commented that internet sales "were clearly a bright spot in the quarter" and traffic to the site, conversions and sales are up. In addition, the company continues to improve the site and is experimenting with web only offers. Given this performance is there a risk factor introduced with the departure of Toulantis and if she was asked to leave what do they want to do differently given this track record of continued improvement? No one asked about the competitive threat from the launch of Borders.com which based on the following chart could be a factor.



Lastly (and thankfully) no asked about their decision not to go after Borders but someone did ask about thoughts on the Kindle which they deflected.