Barnes & Noble Earnings Mixed: Goldman Sachs May Change Recommendation

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Barnes & Noble, Inc. (NYSE:BKS), the literary retailer, this morning reported stronger than expected earnings for the second quarter of fiscal 2013.

Barnes & Noble Earnings Mixed: Goldman Sachs May Change Recommendation

The company reported a loss of $0.04 per share on quarterly revenues of $1.9 billion – down by 0.4 percent from a year-ago. The reported earnings are slightly better than analysts had speculated they would be in the days leading up to their release. Analysts had expected to see losses of roughly $0.09 per share on revenues of $1.88 billion. Barnes & Noble, Inc. (NYSE:BKS) also recorded net earnings of $2 million over the previous quarter; a significant improvement from the year-ago quarter, which saw a loss of $7 million.

Elsewhere, Barnes & Noble, Inc. (NYSE:BKS) has had a mixed bag of relatively minor gains and losses across the business. The company’s retail business generated $996 million in revenue, showing shrinkage from last year that the company attributes to store closures and a downturn in in-store sales, as well as through their web store. Barnes & Noble’s college business, which sells textbooks on college campuses, managed to grow just 0.4 percent year-on-year.

The company’s Nook, which has been going head-to-head with the Kindle and other e-readers, is quickly becoming a stand out element of the company’s portfolio. The Nook raked in revenues of $160 million, growing by 6 percent from Q2 2012. Barnes & Noble also reported that the sales frenzy of Black Friday weekend doubled their sales of the Nook, although they did not offer any numbers to back the claim up.

Riding off the success of the Nook, digital content sales were up by 38 percent over last year’s figures, indicating that many customers are making the transition from physical books over to digital copies.

More good news is likely on the way, though, as the company’s second quarter ended in October, so further gains resulting from the holidays are yet to come. Barnes & Noble, Inc. (NYSE:BKS)’s most recent incarnations of the Nook – the Nook HD and the Nook HD+ – were launched just after the quarter closed. With this hard push by the company into hardware, the next quarter’s results are looking as though they could be promising for Barnes & Noble’s shareholders.

Analysts at Goldman Sachs had mixed feelings about the earnings. They note:

BKS October results tracked slightly short of our expectations.

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Retail sales approximated our forecast, but growth decelerated. EBITDA missed marginally, excluding the reversal of a legal charge.

College delivered good results, based largely on more new stores; SSS tracked in line, with a slight decline.

Nook revenues and earnings fell short. Sales missed by 8%, and EBITDA by 16%. We still need to ascertain whether the nook EBITDA loss contains any payments from MSFT (not clear in the release). Digital content growth slowed to 38% from 46%. The firm noted a doubling in Nook hardware sales over the holiday weekend, aided by promotions in the retail channel. For the quarter, Nook product sales  in bookstores appeared to decline (based on segment eliminations).

We expect a guarded response to these results, given constructive management comments through the quarter. Our estimate and target are under review, pending this morning’s conference call.

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