Barnes & Noble Makes Progress, Shifts Back to Books

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Barnes & Noble (NYSE: BKS)  announced disappointing fiscal second-quarter results on Thursday, and the stock fell nearly 12% in response. But the bookseller lauded traffic improvements and cost-reduction initiatives as it strives to return to sustained profitability.

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Let's take a closer look at how Barnes & Noble capped the first half of its fiscal year, as well as what investors should expect in the quarters ahead.

Barnes & Noble results: The raw numbers

Metric

Fiscal Q2 2018

Fiscal Q2 2017

Year-Over-Year Growth

Revenue

$791.1 million

$858.5 million

(7.9%)

Net income (loss)

($30.1 million)

($20.4 million)

N/A

Earnings (loss) per share

($0.41)

($0.29)

N/A

What happened with Barnes & Noble this quarter?

  • Barnes & Noble doesn't provide specific quarterly financial guidance, but consensus estimates predicted a significantly narrower loss of $0.26 per share on higher sales of $812 million.
  • Comparable-store sales fell 6.3%. Roughly half of that decline stems from a difficult comparison given last year's release of Harry Potter and The Cursed Child, with the other half attributable to lower nonbook category sales.
  • Retail sales (including physical stores and BN.com) declined 7.3% to $769.7 million.
  • NOOK segment sales (including digital content, devices, and accessories) fell 25.9% to $26 million.
  • The company incurred a consolidated EBITDA loss of $25 million, including a $25.2 million EBITDA loss from retail operations and income of $0.2 million from the NOOK segment.

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What management had to say

Barnes & Noble CEO Demos Parneros stated:

Comparable sales improved throughout the second quarter and into November. Book sales continued to strengthen, and we saw improved traffic and conversion trends. As a result of the improving trends, we will continue to place a greater emphasis on books, while further narrowing our non-book assortment. We expect these improvements to continue as we head into the holiday season which, coupled with cost reductions, will enable us to achieve EBITDA of $180 million.

During the subsequent conference call, Parneros added that Barnes & Noble sees opportunities to drive incremental sales through its cafe segment, where early tests of bounce-back offers on receipts helped comps turn slightly positive for the first time in over a year. Barnes & Noble is also encouraged by the early results from its newer small-format concept stores, including ones opened in both Plano, Texas, and Ashburn, Virginia, last quarter.

Looking forward

As a reminder, that full-year EBITDA outlook marks another reiteration of the guidance Parneros provided last quarter. Barnes & Noble also expects comparable-store sales to be roughly flat in the second half, and plans to further reduce costs by $40 million this fiscal year. Parneros added that the company anticipates "steady and consistent improvement in the coming quarters," following the formal launch of its strategic turnaround plan. 

Barnes & Noble is rightly pleased with its successes driving book sales and traffic, and further reducing costs to leave it poised to better capitalize on the holiday shopping season. But it's obviously not firing on all cylinders given the declines of nonbook category sales. And that sort of reverse diversification is hardly comforting as the company searches for ways to differentiate itself from steep competition. So while this might prove to be a buying opportunity if Barnes & Noble indeed delivers steady improvement in the months ahead, it's no surprise to see shares falling right now.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.