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Books-A-Million, Inc. (NASDAQ:BAMM)

F4Q08 Earnings Call

March 26, 2008 5:00 pm ET

Executives

Douglas G. Markham - Chief Financial Officer

Sandra B. Cochran - President and Chief Executive Officer

Analysts

David Magee - SunTrust Robinson Humphrey

Operator

Good day, everyone, and welcome to the Books-A-Million, Inc. Conference Call. Today’s call is being recorded. At this time I’d like to turn the call over to Mr. Douglas Markham. Please go ahead, sir.

Douglas G. Markham

Good afternoon, everyone. We’re pleased to host this conference call regarding the company’s fourth quarter fiscal 2008 results which were issued this afternoon. Joining me today is Sandy Cochran, our Chief Executive Officer and Terry Finley, our President of our Merchandising Group.

Before we begin I’d like to remind everyone that management’s comments in this conference call, which are not based on historical facts, are forward-looking statements. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in periodic reports filed with the SEC.

I’d like to begin this afternoon with a discussion of our financial performance for the fourth quarter and then I’ll turn the call over to Sandy for a discussion of our current business trends.

Our net sales were $168.3 million for the quarter, and $535.1 million for the full year ended February 2, 2008. Excluding the impact of the extra week and additional income from gift card breakage in prior years recognized during the fourth quarter of fiscal year 2007, net sales for the fourth quarter of fiscal 2008 increased 3% and comparable store sales decreased 1.6%. For the full year, net sales increased 5.1% and comparable store sales increased 1.4% when compared with the same 52-week period in fiscal 2007.

Two unrelated events were primarily responsible for increasing our total net sales in the 2007 fourth quarter and fiscal year when compared to 2008. First, the 2007 fourth quarter and fiscal year each included one more week than the 2008 fourth quarter and fiscal year. This additional week produced $9 million in net sales. Also during the fourth quarter of fiscal year 2007, we recognized additional sales of $2.2 million related to gift card breakage from prior years.

At quarter end, we were operating 208 total stores. During the quarter, we opened two superstores. We also closed three superstores and one Bookland.

Gross margin as a percent of sales for the fourth quarter was 32.7% compared to 33.6% on a comparable non-GAAP operating basis. The decrease as a percent to sales was primarily due to additional promotional activity and de-leveraging of our occupancy cost.

Operating expenses as a percent of sales for the fourth quarter increased slightly to 18.9% compared to 18.8% last year on a comparable non-GAAP operating basis. Our increase as a percent of sales is primarily due to the impact of lower comparable store sales and the de-leveraging of our selling, general and administrative expense.

Depreciation expense decreased $54,000 to $3.6 million from $3.7 million. We recorded interest expense in the fourth quarter of $606,000 compared to interest income of $124,000 in the prior year quarter due to higher average debt balances as a result of our special dividend and share repurchase program in fiscal 2008.

Our effective tax rate for the quarter was 37.6% versus 36.7% in the prior year. On a GAAP basis, net income for the fourth quarter was $11.9 million or $0.76 per diluted share compared with net income of $15.1 million or $0.90 per diluted share for the fourth quarter of fiscal 2007.

On a comparable non-GAAP operating basis, net income for the fourth quarter was $11.9 million or $0.76 per diluted share compared with $13.1 million or $0.78 per diluted share in the fourth quarter of fiscal 2007.

Now to provide you with some balance sheet highlights for the quarter, our cash balance at the end of year was $5.6 million compared to $34.1 million in the prior year. Inventory was $206.8 million compared to $200.3 million in the prior year. Net property plant and equipment was $53.5 million compared to $51.5 million in the prior year and our total debt was $34.9 million compared to $7.1 million in the prior year and our shareholders’ equity was $99.1 million compared to $157 million in the prior year.

Our capital expenditures for the fourth quarter decreased to $4.4 million versus $4.6 million in the prior year quarter.

I’ll now turn the call over to Sandy for a general business update.

Sandra B. Cochran

Thank you, Doug and thank you to everyone participating on the call today. I am pleased that we are able to deliver these solid earnings in spite of difficult economic conditions in the fourth quarter. Our focus on the fundamentals of the business contributed to these results.

While our core book business was down slightly, several categories performed well and provided solid comparable gains. Sales in the fiction category were very strong, driven throughout the holiday season by a great lineup of new commercial fiction from big name authors like James Patterson and Nicholas Sparks and the late January release of John Grisham’s legal thriller The Appeal and Stephen King’s latest work Duma Key provided additional momentum for that category at year end.

The biography category continued its year-long growth trend, thanks to the breadth of successful titles that were published earlier in the year, as well as some notable holiday releases from the likes of Steve Martin and Alan Alda. However the real standout in the category remain the phenomenal success of Elizabeth Gilbert’s memoir Eat, Pray, Love. We also continued to see impressive growth in the graphic novel category. An abundance of new offerings from publishers and the impact of cable television programming continue to drive sales in this area.

Our teen category delivered another strong performance this quarter as well while all three titles in Stephenie Meyer’s Vampire series continued to dominate sales. The holiday selling season also found two nonfiction titles on the teen bestseller lists, in Ana’s Story by Jenna Bush and Kids Are Americans, Too by Bill O’Reilly.

Sales in our FaithPoint area compared quite favorably with Joel Osteen’s third quarter release Become a Better You and Indianapolis Colts coach Tony Dungy’s Quiet Strength performing exceptionally well. We’re also please to see solid growth in our gift and bargain book departments during the quarter.

Looking ahead to the first quarter, we anticipate few changes in what remains a challenging and highly competitive marketplace. We’re looking forward to the release of more new fiction from best selling authors including James Patterson, David Baldacci and Mary Higgins Clark and are enthusiastic about the April release of Stephenie Meyer’s first work for the adult fiction market.

We’re now happy to take any questions that you have.

Question-and-Answer Session

Operator

Your first question comes from David Magee - SunTrust Robinson Humphrey.

David Magee - SunTrust Robinson Humphrey

First congrats on the stable numbers during the tough fourth quarter. The question I have is, do you think that the book demand is more or less tied to the overall retail trends now versus say the holiday period? My thought is that maybe now that we’re past the holidays that you’re not quite as dependent on just the overall macro trends right now? Is that an accurate statement to make?

Sandra B. Cochran

I don’t think so. We believe that books in general as a category are more recession resistant than other products we believe are so therefore not much of what we sell is not as discretionary as some other retailers. But in a very tough economic environment, we still struggle to generate traffic and we still see the consumer very focused on promotion and the level of promotional activity we continue to see to remain challenging.

David Magee - SunTrust Robinson Humphrey

Are you seeing any relief with regard to real estate cost as you look for new store sites, is that a positive factor to this?

Sandra B. Cochran

We have been focused on our real estate costs and we have noticed that some landlords have been more willing to have conversations about rent levels and reducing rent and right we think that there’s a lot of retailers who pulled back and so we are looking hard at those centers to be sure that we still have the co-tenancy we need, in addition to the rents we need in what we are looking out to see as a challenging market.

Operator

Mr. Markham, we have no other questions in the queue. So I would like to turn it back to you for any closing comments.

Douglas G. Markham

Great. If there are no further questions I’d like to thank everyone for your participation on today’s call.

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