Barnes and Noble: 14% Decline in Sales Pinned to Lack of Harry Potter Magic

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Barnes & Noble (NYSE:BKS) CFO Joseph Lombardi and CEO Steve Riggio comment on soft Q2 2006 book, music and DVD sales in their recent earnings conference call:

Joseph Lombardi:
This morning, before the market opened, we released our results for the second quarter ended July 29, 2006. Second quarter consolidated sales totaled $1.2 billion, a 1% decline from a year ago which included sales of Harry Potter and the Half-Blood Prince. Sales at Barnes & Noble stores were $1 billion, flat with a year ago. Comparable store sales decreased 2.6% for the quarter, in line with guidance, which called for a low-single-digit decrease.

Sales of hardcover bestsellers remain soft as was the case in the first quarter. Music sales worsened this quarter to a double-digit decline, some of which was offset by a double-digit increase in DVD sales.

In the first quarter, we opened four Barnes & Noble stores and closed one for a quarter end total store count of 687. Comparable store sales at B. Dalton decreased 9.1% for the quarter and now represent less than 2% of consolidated sales. We have closed one more B. Dalton store this quarter, resulting in a total B. Dalton store count of 112.

Sales at the Barnes & are $83 million, representing a 14% decline from last year when we reported a 14% increase. The decline is primarily attributable to last year’s Harry Potter book, which resulted in a big boost in second quarter sales not only from the book itself, but also related Harry Potter merchandise as well as add-on sales. As expected, gross margins were higher than last year, which included the deep discounting of the Harry Potter book.

Steve Riggio

Good morning. As Joe mentioned, second quarter results were right in line with our expectations. We plan for comparable store sales to be negative due to the much stronger line-up of titles from last year. There were no surprises. Since we expected sales to be soft, we were able to manage our expenses well; our gross margin, slightly better than plan, and inventory levels were right in line with plan.

We look back at the first half of this year as one of the softest periods in recent memory for the book industry in terms of hardcover new releases. There were simply very few new hardcover books that generated media buzz or sustained sales by word-of-mouth recommendations.

But I will note that, even in such a lackluster new release environment, our comparable store sales would have been slightly positive in the second quarter when factoring out the extraordinary sales of J.K. Rowling's Harry Potter and the Half-Blood Prince from last year. This fact underscores what we've said time and again: our business certainly benefits from blockbuster titles. We love to have new authors hitting our bestseller list. We love when books are generating lots of media buzz and traffic, but we have a very strong foundation. That foundation is our back list when publishers' lists are weak.

I will mention that there was one notable bright spot in the quarter and it's due to some extraordinary of steps we took to promote a single book. Kim Edwards' novel The Memory Keeper's Daughter is one of the fastest-selling trade paperbacks in our history. We supported this title very strongly on its publication. The book shows no sign of slowing down and it's fast becoming a favorite book group selection of readers everywhere. Those are my comments on the second quarter.

BKS 1-yr chart:


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