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Barnes & Noble, Inc. (NYSE:BKS)

F1Q07 Earnings Call

May 24, 2007 10:00 am ET

Executives

Joseph Lombardi - Chief Financial Officer

Steve Riggio - Vice Chairman of the Board, Chief Executive Officer

Analysts

Nancy Hoch – JP Morgan

Danielle Fox - Merrill Lynch

Blaine Marder - Loeb Partners

Presentation

Operator

Good day, everyone. Welcome to this Barnes & Noble first quarter 2007 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer, Mr. Joseph Lombardi. Please go ahead, sir.

Joseph Lombardi

Good morning and welcome to Barnes & Noble's first quarter 2007 conference call. Joining us today are Steve Riggio, Mitchell Klipper, Marie Toulantis, and other members of the senior management team.

Before I begin, I would like to remind you this call is covered by the Safe Harbor disclosure contained in our public documents and is the property of Barnes & Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.

This morning before the market opened we released our results for the first quarter ended May 5, 2007. Consolidated sales totaled $1.145 billion for the quarter, a 3% increase over last year. Sales at Barnes & Noble stores were $1.013 billion for the quarter, up 3.3% over a year ago. Comparable store sales increased 1.7% for the quarter, which was somewhat better than guidance which called for a flat to slightly positive increase.

After a disappointing month in February in which our sales were behind plan, followed by the month of March in which comp store sales were negative, we had a stronger than expected sales performance in April beginning with the Easter week and the book lineup throughout the month.

In the first quarter, we opened four Barnes & Noble stores and closed three for a quarter end total store count of 696. We have closed one more B. Dalton store this quarter, resulting in a total B. Dalton store count of 97. Sales at BarnesandNoble.com were $93.8 million for the quarter an 8% comparable sales increase compared with the prior year period.

First quarter results were a loss of $0.03 per share which was better than the company's guidance for a loss of $0.08 to $0.12 per share. However, our store opening and store closing schedule for 2007 has been adjusted, and as a result certain expenses have been deferred into the second and third quarter periods. This deferral is about $0.03 per share. During the quarter, the company closed its Memphis Internet distribution center as planned and incurred costs of $0.06 per share.

As previously announced, the company completed its review of its stock option practices and incurred after tax costs of $6.8 million, or $0.07 per share, during the quarter. Excluding both the distribution center closing charges and the stock option review costs, first quarter net earnings were $0.10 per share against last year's $0.14 per share. The earnings decline is largely due to gross margins, our guidance reflected 90 to 100 basis point margin reduction due to the impact of the rollout of our new membership discount structure which went into effect last October.

Our margins this quarter declined 120 basis points, 15 of which relates to the Internet distribution center closing costs with the balance largely due to the higher discounts. Our selling and administrative expenses were 60 basis points unfavorable as a percentage of sales. Excluding the Internet distribution center closing and stock option review costs, the expense rate was 30 basis points favorable to due to tight expense controls.

Depreciation expense is high this quarter as it includes $2.6 million of accelerated depreciation related to the closing of the Memphis distribution center. The company's effective tax rate is 40.0%, lower than last year's rate of 40.75%. The adoption of FASB Interpretation 48, Accounting for the Uncertainty in Income Taxes, had no impact on the company's financial statements.

At quarter end, the Company's balance sheet and financial condition remained in excellent shape and inventories were well managed. The company has no debt at quarter end and our cash balance is $121 million.

In the first quarter of 2007, the company acquired shares under its share repurchase program for $27.9 million at an average price of $40.34. With last week's announcement that our board of directors has authorized another $400 million repurchase program, the company has $424 million remaining under both authorizations.

Now I would like to talk about second quarter guidance. The company expects comparable store sales to increase in the low to mid single-digits, reflecting the additional sales volume we expect with the seventh Harry Potter book in July. Earnings per share for the quarter are expected to be in the range of $0.08 to $0.12 per share. Our full year guidance for EPS remains unchanged at $1.49 to $1.67 per share.

At this point I would like to turn the discussion over to our Chief Executive Officer, Steve Riggio.

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Steve Riggio

Good morning. The first quarter of 2007 was the first non-holiday quarter after we introduced new lower prices to our members in October of last year. As we turn the corner into January and had a clearer picture of what the effect of our new member pricing would be on an everyday basis, we were pleased with the results. Both new member enrollments and renewals from existing members continued to rise as more and more customers came to see the value in becoming members.

It is a simple program, immediate and instantly gratifying. Across the board everyday discounts, in stores and online; even higher discounts on hardcovers and even deeper discounts on best sellers. Plus, members get weekly e-mails that deliver coupons and special offers.

Compared to last year's first quarter, our margins did decline, but they were in line with our own forecasts.

As Joe mentioned, our comparable store sales were a bit better than planned, but Internet sales grew 8% which we were very pleased with. Both benefitted from a better new release schedule than we've seen in some time. Rhonda Byrne’s The Secret has the unique distinction of being our bestselling title in hardcover, audio book and DVD.

The third Barnes & Noble recommends selection, Mohsin Hamid’s The Reluctant Fundamentalist, become an instant fiction bestseller upon publication, and that was the third straight Barnes & Noble recommends title to do so. The revival of Oprah Winfrey's book club produced strong sales of Sydney Poitier's Measure of a Man and Cormac McCarthy’s The Road. Non-fiction highlights included Einstein by Walter Isaacson and In an Instant by Bob Woodruff.

As we look at the second quarter, as we all know J.K. Rowling’s Harry Potter and the Deathly Hallows arrives July 21st. The second quarter also has a very good lineup of adult fiction and non-fiction titles. Khaled Hosseini's 1,000 Splendid Suns debuted yesterday with very strong sales, as did the Reagan Diaries which received a great deal of publicity. New fiction from James Patterson, Nora Roberts, Robert Parker and Ian McEwen are also due.

Non-fiction releases include two books on Hilary Clinton, Women in Charge by Karl Bernstein that goes on sale June 5th; and Her Way by Jeff Garth that goes on sale June 8th. We expect, of course, many more titles by and about the candidates for the presidential election season to be coming over the next year to 15 months.

Thank you. We would like to turn it over to questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nancy Hoch - JP Morgan.

Nancy Hoch - JP Morgan

First, it was nice to see the positive comp in the quarter, and you mentioned the pickup in April. Was that an industry wide pickup, or are you gaining share? Have you seen momentum continue into May?

Joseph Lombardi

It is a little early yet for us to determine whether or not it is a share or industry pickup. We certainly think the titles are good, as Steve mentioned. I am assuming that the books were good for many people. The trend in May is a bit more mixed.

Nancy Hoch - JP Morgan

On the Q2 guidance, the $0.08 to $0.12, is that a clean number, or is there more one-time charges from the options investigation in that?

Joseph Lombardi

Yes. There is probably a penny or two.

Nancy Hoch - JP Morgan

On D&A, have we finally seen an inflection point in D&A where we are going to expect to see that grow from now on, after a couple years of decline?

Joseph Lombardi

Slightly, yes, because we have obviously a little bit of a higher CapEx plan, a bunch of that is systems, which has relatively short-term life, so we depreciate that all pretty quickly.

Nancy Hoch - JP Morgan

Joe, what was CapEx in the quarter?

Joseph Lombardi

$33 million.

Operator

Your next question comes from Danielle Fox - Merrill Lynch.

Danielle Fox - Merrill Lynch

First, I was wondering if you can talk about what you are seeing in response to the loyalty program. It looks like it has had a very positive impact on comps, whether or not that changes your view at all on the price of elasticity of this industry? Do you think maybe that helped drive some of the comps upside relative to expectations, or it was more the title release schedule?

Steve Riggio

I think the title release schedule was probably the best we have seen in probably two to three years in terms of the first quarter, so that was probably the biggest factor.

Danielle Fox - Merrill Lynch

Could you talk a little bit about the categories? Is it fair to say then that books comped strongest, but what was happening in music, cafe, and gift?

Steve Riggio

We never have broken out sales by department, giving individual numbers for each of the departments, but most of our sales as you know are books, and that represents the lion's share of the comp, and kind of as that flows, the rest of the business flows. The books are the traffic builders, people come to us. We get increased traffic when we have books like The Secret or A Thousand Splendid Suns, so that is really the relevant number. The music business, I think we have said all along has been declining, but from talks with industry folks, we are faring better than most because our focus has always been on the adult music sector: the classical, the opera, the jazz and such.

Danielle Fox - Merrill Lynch

When should we see the gross margin impact from the expanded loyalty benefits begin to moderate? Would that be in October when you lap it?

Joseph Lombardi

We lap it really in the last week of the third quarter. There is really no lapping until the fourth quarter.

Operator

Your next question comes from Blaine Marder - Loeb Partners.

Blaine Marder - Loeb Partners

Joe, could you call out the one-time items on a dollar basis, both the gross margin and SG&A in the quarter?

Joseph Lombardi

The one-time items that hit the line items in cost of sales and occupancy of $1.7 million pre-tax, selling and administrative expenses $9.9 million, and depreciation and amortization, $2.6 million.

Blaine Marder - Loeb Partners

You have a large share repurchase authorization. Do you expect to be active in the market on a daily basis, or do you have blackout periods, or do you look at where the stock is trading? How do you think about how aggressive you get on the share repurchases?

Steve Riggio

The company certainly has blackout dates, and really related to financial releases and what not, as it typically does, and we don't have a set schedule for how we want to perform our buyback, but we have just announced the authorization.

Blaine Marder - Loeb Partners

Might the board consider a one-time buyback, a Dutch tender, or something like that?

Steve Riggio

I would say the board is always looking at all the alternatives for how it wants to manage its program. At this point, it has just decided to announce a general authorization of 400 million on top of what we had last year.

Joseph Lombardi

At this point are there any more questions?

Operator

We have no further questions at this time.

Joseph Lombardi

Thank you for listening to our first quarter conference call. Please note that our next scheduled financial release will be our second quarter sales release on or about August 23rd. Thank you.

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Source: Barnes & Noble F1Q07 (Qtr End 5/5/07) Earnings Call Transcript
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