Barnes & Noble Q4 2005 Earnings Conference Call Transcript (BKS)

Barnes & Noble (BKS)
Q4 2005 Earnings Conference Call
March 16, 2006, 11:00 AM

Executives

Joseph Lombardi, Chief Financial Officer
Steve Riggio, Chief Executive Officer

Analysts

Mark Rowen, Prudential
David Sheek, Stifel Nicholas
Matthew Kessler, Goldman Sachs
David McGee, SunTrust Roberts and Company

Presentation:

Joseph Lombardi, Chief Financial Officer

Thank you. Good morning and welcome to Barnes & Noble’s 4th Quarter and 2005 Fiscal Year-End Conference Call. Joining us today are Steve Riggio, Mitchell Klipper, Marie Toulantis, Alan Kahn, and other members of the senior management team. Before I begin, I would like to remind you that 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 and Noble.

This morning before the market opened, we released our results for the 4th quarter and full year ended January 28, 2006. Consolidated sales for Barnes & Noble increased 5% to $5.1 billion dollars for the full year. Sales at Barnes & Noble stores are up 6% to $4.4 billion. Comparable store sales increased 2.9% for the full year, at the high end of guidance for an increase in the 2-3% range. Comparable store sales in the 4th Quarter increased 3.3%. On January 5, we reported that our comparable store sales for the nine-week holiday sales period through December 31 were 2.3%; our full 4th quarter comparable store sales improved to 3.3% as a result of strong January sales.

In the 4th quarter, we opened two Barnes & Noble stores and closed four for a quarter end total store count of 681. For the full year we opened 27 stores and closed 12 for a net Barnes & Noble store count increase of 15. We are especially pleased to report that our Maderay, Louisiana store which was damaged during Hurricane Katrina re-opened on Tuesday this week. Sales at B. Dalton which now account for less than 3% of sales were down 20% for the year due to store closings. Comparable store sales at B. Dalton increased .9% for the year and increased 3.8% for the 4th quarter.

For the full year, store closing costs reduced earnings about $0.06 per share and is incorporated in the reported results. We have closed 23 more B. Dalton stores the Quarter, resulting in a total B. Dalton store count of 118. A total of 36 B. Dalton stores were closed during 2005.

Sales at barnesandnoble.com increased 5% this year to nearly $440 million dollars. Gross profit margins improved 30 basis points this year on top of last year's 50 basis point increase. We continue to maintain our focus on the basic blocking and tacking of retail supply chain management. Specifically decreasing reliance on book wholesalers, increasing purchases to our distribution network, creating promotions which drive top and bottom line growth, increasing sales of Sterling products in our stores and online, and leveraging our fixed occupancy costs due to the comparable store sales gains. Best-seller markdowns were a bit of a negative this year largely due to the six Harry Potter books, but that was somewhat offset by reduced sales of lower margin music, where we posted our first full year of negative comps down about 7%.

Our selling and administrative expense rate was 60 basis points higher, representing the sales this year. This increase primarily relates to three expenses recorded during the year; first, a 2nd quarter $6.9 million pre-tax charge related to legal expenses; second, a $12.7 million dollar pre-tax charge of $7.5 million net of tax, related to the impairment of terms to our assets; and finally, $3.6 million related to stock compensation costs associated with restricted stock. For the 4th quarter excluding the asset impairment charge, our selling and administrative expense rate was 20 basis points lower than last year due to leverage. Net earnings from continuing operations increased 19% for the year to nearly $147 million, excluding the impact from the non-cash impairment charge, net earnings increased 25% year-over-year. Earnings per share for the year were $2.03 at the high end of our previously affirmed guidance range and a 21% increase over last year. 4th quarter earnings per share were a $1.76 also at the high end of guidance, excluding the non-cash asset impairment charge. 2005 earnings per share were $2.14 representing a 27% increase over 2004.

On the balance sheet front, inventories remain in excellent shape. We continue to maintain our focus on working capital management and supply chain improvements. Our total company inventory is up about 3% on the 5% sales increase. Inventory turnover improved to 2.4 four-times in each of the last three years. We have improved our turn rate at about 1/10 per year while maintaining our leadership position with the largest selection of books available and on hand for immediate delivery. As reported in our press release, our operating free cash flow for the year was a record $362 million. The company had its second year in a row of working capital improvement added about $115 million dollars to cash flows. Gross capital expenditures for 2005 were $187 million, slightly lower than guidance of $190 million.

We began the year with $536 million dollars in cash at the end of the year after pre-paying in full the $245 million dollar term loan, acquiring $7.7 million v-cash shares for $283 million dollars under our share re-purchase program and also paying $20 million dollars in dividends we are left with $373 million dollars in cash and no debt. In the 1st quarter of 2006, the company acquired an additional 1.6 million shares for $68 million dollars under a share re-purchase program at an average price of $42.56.

And now for guidance for 2006. Our sales guidance for the 1st quarter and full year is for a low single digit comparable store sales increase. The company will adopt Statement of Financial Accounting Standards No. 123 (R) in the 1st Quarter of 2006 and begin expensing stock options. As a result we have provided earnings per share guidance with and without charges associated with stock compensation expense. We did have these expenses in 2005 but only for expenses associated with restricted stock which amounted to $0.03 per share. The company expects earnings per share for the 1st Quarter between $0.10 and $0.14 based upon a diluted share count of 70.3 million shares. This includes a $0.04 per share projected charge for stock compensation costs. Without those costs, on an equivalent basis with last year we are forecasting earnings per share between $0.14 and $0.18 against last year’s $0.13. For the Full-Year, the company expects earnings to be in the range of $2.20 to $2.30 per share based upon a diluted share count of 71 million. Our full year results include a $0.15 impact related to stock compensation expenses. Excluding this impact, the company is forecasting a 2006 full year earnings per share range of $2.35 to $2.45 against $2.06 last year which represents a 14-19% increase.

I noted in our release and our guidance for 2005 that we would incur additional charges associated with the conversion plans for our new distribution terms. We guided that we expected costs for 2005 of $0.08 per share and it came in slightly higher at $0.09 per share solely due to the reduced share count related to the share re-purchase program. We are forecasting and guiding another $0.09 for 2006 in line with our previous comments and which is included in guidance. The conversion and all related charges are expected to be completed by the end 2006. We are also forecasting operating free cash flow of about $200 million dollars next year and gross capital expenditures of between $190-200 million. We expect to open 30-40 stores this year and close 15-20. At this point, I’d like to turn the discussion over to our Chief Executive Officer, Steve Riggio.

Steve Riggio, Chief Executive Officer

Good morning, we entered the 4th quarter well aware that no blockbuster book titles were going to emerge. Instead it was a season characterized by a solid list of new releases across many categories. Top non-fiction titles included Doris Kearns Goodwin’s Team of Rivals, Jimmy Carter’s Our Endangered Values, John Grogan’s Delightful Marley and Me, and Thomas Freidman’s The World is Flat. It was a season marked by a number of great gift books with the stand out being Silver Spoon, “The Bible of Italian Cooking