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Barnes & Noble Bandwagon Headed For A Crash

By Glenn Curtis

Tickers in this Article: BKS, AMZN, BGP

Book retailer Barnes & Noble's (NYSE:BKS) third-quarter earnings release was a pretty good read. The results were so good that many people are now jumping on "bookwagon".

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However, in this highly competitive space, I doubt Barnes & Noble's recent good fortune will last.

Very Solid Quarter
Before the open of the market on November 20, Barnes & Noble reported third-quarter earnings of 7 cents per share. This was well ahead of both the 4-cents-per-share loss it booked in the comparable quarter a year ago, and the 8-cents-per-share loss that Wall Street had been expecting. The company also saw its sales increase roughly 5.7% from $1.11 billion last year to $1.18 billion in the current quarter. Analysts had been expecting sales of about $1.15 billion. And finally, its same store sales increased a respectable 2.6% for the period.

According to the earnings release, the company can thank authors Alan Greenspan, John Grisham, Ken Follett, Nicholas Sparks and Stephen Colbert for its results.

Things were so good that management now expects the company to earn between $1.67-1.86 per share in the fourth quarter (analysts had been expecting $1.70 per share).

Barnes & Noble also upped its full year estimates to a range of $1.91-2.09 per share from $1.69-1.87. Analysts had been looking for full year earnings of roughly $1.86 a share. Very simply, it was a great quarter for the company.

Danger from the Amazon
The problem is there is a nasty competitive environment out there. First let's look at Amazon (Nasdaq:AMZN). The online book retailer isn't sitting still. Amazon's CEO, Jeff Bezos, recently unveiled a product known as Kindle, a hand-held device that can hold around 200 books. The gadget is also wirelessly connected to the web and allows readers to download titles at a fairly low price. It's basically an iPod for books - combining the pleasure of staring at a tiny electronic screen with the excitement of downloading text files.

Seriously though, it's possible a gadget like this could change the traditional publishing and bookselling landscape the way the iPod has done for music. Kindle coupled with Amazon's vast library of titles and its plethora of other in-demand merchandise makes Amazon a formidable competitor. True, Barnes & Noble has built out an online presence, but it's still highly dependent on its brick-and-mortar locations. This is a disadvantage in my book. (For related reading on electronic retailing, see Choosing The Winners In The Click-And-Mortar Game.)

Enemy at the Border
Next, consider Borders Group (NYSE:BGP). I love Borders, both for its layout and its huge selection. Going forward, I suspect Borders will remain a thorn in Barnes & Noble's side as it expands its physical presence. Another reason I think that Borders could be a problem for Barnes & Noble is a company called Pershing Square.

Pershing Square is a shareholder activist that now owns in excess of 17% of Borders' stock according to a recent Reuters report. If history is any indicator, Pershing will be actively pushing Borders' management team to do something to enhance shareholder value and to make itself even more competitive going forward. In short, I think that this too could be a negative for Barnes & Noble.

Bottom Line
Barnes & Noble is coming off a solid quarter and it upped its full year earnings estimates. However, due to competitive pressures, I am just not sure its good fortune will last. For that reason, I think it makes sense to stay away from the stock.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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