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Barnes & Noble F3Q07 (Qtr End 11/3/07) Earnings Call Transcript

Nov. 20, 2007 3:07 PM ETBarnes & Noble, Inc. (BKS)

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Barnes & Noble, Inc. (NYSE:BKS) F3Q07 Earnings Call November 20, 2007 10:00 AM ET

Executives

Joseph Lombardi - CFO

Steve Riggio - CEO

Analysts

Aaron for Charles Grom – JP Morgan

Bill Armstrong - CL King

Deron Kennedy - Goldman Sachs

Dave Weiner - Deutsche Bank

Operator

Good day and welcome to the Barnes & Noble third quarter2007 earnings results conference call. Today's call is being recorded. At thistime for opening remarks and introductions, I would like to turn the call overto the Chief Financial Officer, Mr. Joseph Lombardi. Please go ahead, sir.

Joseph Lombardi

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

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

This morning before the market opened we released ourresults for the third quarter ended November 3, 2007. Consolidated sales totaled $1.176 billion for the quarter,a 5.7% increase over last year. Sales at Barnes & Noble stores were $1.015billion for the quarter, up 4.5% over a year ago. Comparable store salesincreased 2.6% for the quarter, which was at the high end of guidance for aflat to low single-digit increase.

In the third quarter, we opened 14 Barnes & Noble storesand closed three for a quarter end total store count of 709. We closed two moreB. Dalton stores in the second – I mean, third quarter resulting in a total B.Dalton store count of 92.

Sales at BarnesandNoble.com were $108 million for thequarter, a 14.5% comparable sales increase compared with the prior year period.Third quarter net earnings were $0.07 per share.

The company's results include an after-tax benefit of $6.2million, or $0.09 per share, resulting from a more favorable physical inventoryshortage rate than previously estimated and accrued. Excluding this benefit,third quarter net loss per share was $1.8 million, or $0.03 per share, betterthan guidance for a loss of $0.06 to $0.10 per share.

As a result of the physical inventory benefit, gross marginswere 30.2% or 40 basis points higher then last year. The previously mentionedinventory benefit was $10.3 million on a pre-tax basis. Excluding this benefit,gross margins were 29.3%, or 50 basis points lower then last year. Our guidancefor the year reflected a 90 to 100 basis point reduction in gross margins dueto the rollout of our new membership discount structure a year ago.

Despite the higher sales of discounted bestsellers thisquarter, our gross margins were better than guidance primarily due to twofactors:

Our distribution costs were lower than planned;
Our comp store sales gains enabled us to leverage fixed occupancy costs.

Our selling and administrative expenses were favorable tolast year by 30 basis points as a result of sales leveraging. Operatingearnings were 0.4% for the quarter. After adjusting for the inventory benefit,operating losses as a percent of sales was flat with a year ago at negative0.5%.

At quarter end, the company's balance sheet and financialcondition remain in excellent shape. Inventories increased less then 2%compared with last year with 5% more sales on a year-to-date basis. The companyhas $4.4 million of debt, net of cash on hand. Seasonal borrowings peaked at$38 million in early November.

In the third quarter of 2007, the company acquired 4.9million shares under its share repurchase program for $172.5 million at anaverage price of $35.36. Year-to-date, the company has acquired 6 millionshares for $220 million at an average price of $36.50. The company has $232.4million remaining under its existing share repurchase authorization.

Capital expenditures were $58.2 million for the quarter and$140.3 million year-to-date.

Now for fourth quarter and full year guidance. For thefourth quarter and full year, the company expects comparable store sales atBarnes & Noble stores to increase in the low single-digits. The companypreviously expected full year comparable store sales to range from flat toslightly positive.

Fourth quarter earnings per share is expected to be in therange of $1.67 to $1.86. The company is increasing its full year earningsguidance to be in the range of $1.91 to $2.09, compared with previous guidanceof $1.69 to $1.87.

Guidance has been raised $0.22 per share for three reasons:

The third quarter out performance of $0.14 per share;
The reduced fully diluted share count as a result of third quarter share repurchases, which will benefit the year $0.04 per share;
Improved net earnings from higher projected fourth quarter sales guidance of $0.04 per share.

The weighted average fully diluted share count forecastedfor the fourth quarter is 64.3 million shares and the weighted average fullydiluted share count forecasted for the full year is 67.1 million shares.

In addition, full year capital expenditures are nowforecasted to be about $10 million lower then previously announced. Updatedcapital expenditures guidance for fiscal 2007 is now $190 million to $200million.

Now I would like to turn the discussion over to our ChiefExecutive Officer Steve Riggio.

Steve Riggio

Good morning. We are pleased with our third quarter results,especially in light of the comparatively soft retail environment. Ourcomparable store sales grew 2.6%, and that was on top of a 2% growth in thethird quarter of 2006. Our Internet sales grew 14.5%, compared to slightlynegative sales in the third quarter of 2006.

I think there are three factors we want to point to thatwere behind the numbers. First and most importantly is the effect of media onthe book industry and on the sales of individual titles. Following the enormouspublicity generated by JK Rowling's HarryPotter and the Deathly Hallows, we were frankly prepared for the bookbusiness to return to a relatively quiet period.

While we did believe it would be a good quarter for newreleases, one can never bank on extensive media coverage of writers and theirbooks. It's just a hard thing to predict. We were pleasantly surprised when thethird quarter opened quite strong with the release of Stephanie Meyer's Eclipse, which became the fastest-sellingteen novel in our history. The Stephanie Meyer phenomenon was covered extensivelyin the media and the anticipation for the next August release of the finalvolume in her series actually started building the day that Eclipse went on sale. So that wasterrific news.

Indeed, media coverage of adult books was more extensivethen typical, led by two shows, the CBS news magazine 60 Minutes and Oprah Winfrey.60 Minutes featured stories of AlanGreenspan's The Age of Turbulence,Clarence Thomas' My Grandfather's Son andJoel Osteen's Become a Better You,and Valerie Plame Wilson's Fair Game shotthose books onto the top of our bestseller list. We see the impact immediatelyin our Internet sales and in the days following after these stories run.

The Oprah effect-- which of course, everyone in the industry knows about -- I think was strongerthen typical and it was probably due to the sheer number of books that shementioned on her shows, not just the selections from her Oprah Book Club.

The phenomenal demand for Jessica Seinfeld's Deceptively Delicious Cookbook was apleasant surprise, as was Oprah's support of Elizabeth Gilbert's Eat, Pray, Love; her full hour show on CathyBlack's Basic Black; and her coverageof Michael Roizen's YOU: Staying Young.Of course, her book club selections are still the most powerful and trustedendorsement in the business, even sending classics such as Gabriel García Márquez’s Love in the Time of Cholera to the top of bestseller lists.

In terms of other media, we also saw the growing impact ofshows like Jon Stewart and Stephen Colbert, with the latterproducing one of the major bestsellers of this year, I Am America (And So Can You!).

The second factor, it was a particularly good quarter fornew releases for brand name fiction writers and those included John Grisham,David Baldacci, Patricia Cornwell, James Patterson and the return of KenFollett with his World Without End.

Lastly, the third quarter saw the launch of our new websitewhich impacted Internet sales. Utilizing the latest web technologies, our newsite enables more and better and faster browsing. It features an updated designand we think it makes it feel, more than ever, like a natural home, just as ourbookstores do. We've increased the amount of rich media on the site, includingpodcasts, original video programming, live webcasts and that gives users anopportunity to become more intimate with books and writers. We launched our new site with an extensiveemail towards the end of the quarter and that generated a great deal ofinterest, accolades from our customers and the resulting traffic.

The strength of the new release schedule, the attention ofthe attendant media did enable us to deliver sales at the higher end of ourexpectations and we did that without ramping up promotional coupons ordiscounts. We did about the same amount of activity as in the prior year.

Our member base, Barnes & Noble members who pay a $25annual fee to get extensive discounts in our stores, continued to grow throughthe year as more and more customers see the value in being members.

As we look ahead to the fourth quarter and the holidayseason, on a negative note, I think the writers' strike is certainly not goodnews for the book business, as we are already hearing of cancellations ofwriters that were scheduled to be on some of the major talk shows. Nevertheless,several books by brand name writers with new and forthcoming titles includingSue Grafton, Jim Cramer, Steve Martin and Dean Ornish. There's a very, verystrong lineup of gift books for this year.

As in previous times, we expect a film version of MitchAlbom's For One More Day, which airsI believe on December 9 to be perfectly timed for the holiday season, as thatwill be a great gift book.

Thank you.

Joseph Lombardi

Now we would like to turn it over to questions.

Question-and-AnswerSession

Operator

Your first question comes from Charles Grom – JP Morgan.