<THE LUNCHTIME NEWS>
Thursday, August 20, 1998
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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Barnes & Noble to Spin Out Online Biz

Barnes & Noble (NYSE: BKS), the nation's largest retail bookseller, today turned a new page in its storied pursuit of leading online book vendor Amazon.com (Nasdaq: AMZN) by announcing plans to take its barnesandnoble.com unit public in an IPO this fall. Though the prospectus may not hit the SEC's EDGAR database for another month, investors liked the news, bidding up Barnes & Noble shares by $2 3/4 to $40. The stock had recently swooned into the mid-$30s after hitting an all-time high of $47 1/2 in early July.

Apparently deciding that intelligent opportunism is the better part of valor, Barnes made the noble decision to give enthusiastic Internet investors a chance to award its online operations a premium multiple. That should reduce the cost of capital for this fledgling business. Meanwhile, the move should clarify results at the company's old-line retail operations, whose healthy profits are currently being somewhat obscured by startup losses at the online unit. The spin-out announcement, in fact, came parcel of the firm's second quarter earnings release, which showed a loss of $5.7 million or $0.08 per share, a penny worse than estimates due to losses at barnesandnoble.com.

For the quarter ended August 1, the company booked sales of $675 million, up 9.3% from the year-ago period. Revenues at its flagship stores jumped 11.1% on 5% higher same-store sales. Meanwhile, its mall-based B. Dalton unit showed a 1.2% dip in same-store sales, continuing a trend besetting all of the bookselling biz, which has increasingly moved from the malls to the superstores. Thanks to improved gross margins, operating profits at its retail outlets soared 103% to $19.6 million, good for net profits of $7.9 million or $0.12 per share. That greatly improved on the break-even 2Q '97. The company's overall loss comes from factoring in a net loss of $13.6 million or $0.20 per share at the Internet operations. Barnes & Noble now operates 489 flagship stores, adding eight net new outlets during the quarter, and 510 B. Dalton stores after closing ten.

The online biz, though, continues to experience exceptional growth, with revenues of $12.5 million, up 470% from last year and 33% sequentially. The website also added 220,000 new customers during the quarter, up 44% from the half million at the beginning of May, with repeat customers accounting for 50% of online revenues. Yet given the small base from which barnesandnoble.com started, those results pale next to Amazon.com's. Amazon's second quarter sales vaulted to $116 million, up just 316% from last year but 33% sequentially. Though its new customer list grew by just 31%, that amounted to 880,000 new purchasers, or four times the number added by Barnes during the period. That boosted Amazon's cumulative customer count to 3.14 million, or more than four times as many as barnesandnoble.com claims. Moreover, Amazon's repeat customers accounted for 63% of sales in the latest period, suggesting its community of users may be more loyal and thus more valuable. Such metrics will no doubt play a role in valuing a newly independent barnesandnoble.com.

UPS

Los Angeles-based financial services company SunAmerica Inc. (NYSE: SAI) shined $9 13/16 to $74 1/16 after announcing it will be acquired by insurance giant American International Group (NYSE: AIG) in an all-stock deal valued at around $18 billion. SunAmerica shareholders will receive 0.855 shares of AIG common stock for each SunAmerica share. Based on AIG's closing price yesterday, this represents a 47% premium over SunAmerica's last closing price of $64 1/4. AIG, which also announced that its board has revoked its previously existing authorization to buy back shares in the open market, lost $4 7/8 to $89 3/4.

Internet portal company Lycos Inc. (Nasdaq: LCOS) added $2 3/8 to $71 3/4 after reporting a fiscal fourth quarter loss of $0.09 (before charges) per share compared with a loss of $0.04 in the year-earlier period. Analysts had been expecting a wider loss of $0.13 per share. Revenues increased 26% over Q3 and 145% year-on-year.

Cisco Systems (Nasdaq: CSCO) picked up $1 5/8 to $102 7/8 after announcing it has promoted Bill Carrico to senior vice president to lead the company's efforts to sell computer networking equipment to the fast-growing market of small- and medium-sized businesses. Carrico succeeds Howard Charney, who is cutting back his involvement with the company for personal reasons.

After falling on rumors yesterday, The Learning Co. (NYSE: TLC) regained $3 3/4 to $24 3/8 after saying it is committed to completing its previously announced merger with Broderbund Software (Nasdaq: BROD) as planned on August 31. The company also clarified that the $75 million it used in accounts receivable facilities from its banks will not impact its financial results. Broderbund recovered $3 1/8 to $19 1/2.

Dispelling rumors of accounting irregularities, temporary manual labor provider Labor Ready (Nasdaq: LBOR) recovered $1 13/16 to $23 5/16 after saying that it stands by its financial statements and that its stock is undervalued. The company also announced that sales last week totaled a record $15 million. To join Labor Ready's conference call today, call (800) 309-8223 five to ten minutes before 3:00 p.m. Eastern time.

Data collection and management systems company National Computer Systems (Nasdaq: NLCS) jumped $2 1/16 to $23 5/16 after reporting Q2 EPS of $0.30, up from $0.22 and beating analysts' expectations of $0.27. Revenues increased 33% to $128.1 million from last year's $96 million.

Diversified financial services company Amresco Inc. (Nasdaq: AMMB) rose $1 13/16 to $21 13/16 after denying a reported rumor that it would write down its retained interests from securitization in the third quarter. In response to the drop in the company's shares in the past several days, Amresco plans to buy back up to 1 million shares.

Dominick's Supermarkets (NYSE: DFF) checked out a $8 3/16 gain to $47 11/16 after announcing it has hired an investment bank to help it evaluate strategic alternatives after receiving unsolicited expressions of interest in buying the company from other supermarket operators.

DOWNS

Intel Corp. (Nasdaq: INTC) slumped $2 1/2 to $87 1/16 after Merrill Lynch analyst Tom Kurlak lowered the chip giant's long-term rating to "neutral" from "accumulate." Fellow chip maker Texas Instruments (NYSE: TXN), which also got the downgrade ax from Kurlak, fell $1 1/2 to $59.

Microprocessor and integrated circuits maker National Semiconductor Corp. (NYSE: NSM) sank $1 15/16 to $11 11/16 after saying it expects its fiscal Q1 and Q2 losses to be worse than the $0.42 per share loss recorded in Q4 of 1998. The firm added that its first quarter sales are expected to slide 8% to 10% sequentially due to "weakness in overall semiconductor demand."

Enterprise software firm BEA Systems (Nasdaq: BEAS) lost $1 1/16 to $18 15/16 after reporting fiscal Q2 EPS of $0.07 (before acquisition charges) compared with breakeven results last year, which was in line with the Street's mean estimate.

More mud slinging from investment firm Asensio & Co. dragged down shares of Turbodyne Technologies (Nasdaq: TRBD) $31/32 to $6 7/8 this morning. In a press release, Asensio repeated claims that Turbodyne's electric supercharger is "easy to duplicate" and has "failed to generate any sales in the last five years." Also, Asensio alleges the company has recently issued at least 4.9 million new shares "without an underwriting or any sort of prior notice to shareholders," representing "extraordinary... dilution to existing shareholders."

Online data broadcasting firm WavePhore (Nasdaq: WAVO) fell $1 1/4 to $8 after Friedman, Billings, Ramsey downgraded the firm to "sell" from "speculative buy." The company actually challenged the downgrade in a press release, claiming FBR does not have "full and comprehensive knowledge of our current business operations."

Life insurance and annuity underwriter Life USA Holding (Nasdaq: LUSA) slipped $1 7/8 to $11 3/8 after saying low interest rates are causing a "shrinking market for fixed income annuities," which will result in fiscal 1998 sales as much as 20% below expectations. Fiscal year earnings will also consequently come in below the $1.08 per share forecasted by the Street.

Restoration Hardware (Nasdaq: RSTO) was hammered for a $2 1/4 loss to $31 5/8 after the upscale home furnishings store operator reported a pro forma fiscal Q2 loss of $0.04 per share versus a $0.05 per share loss a year ago, which was in line with the loss expected by the Street.

"System on a Chip" integrated circuit maker LSI Logic (NYSE: LSI) fell another $5/8 to $15 3/16 after warning yesterday that its fiscal Q3 EPS will miss analysts' estimates of $0.23 for the period.

Housewares and crafts retailer Garden Ridge Corp. (Nasdaq: GRDG) slid $5/8 to $10 5/16 after reporting fiscal Q2 EPS of $0.01 compared to $0.04 last year, which was in line with the company's earnings warning earlier this month. At that time, Garden Ridge said inventory problems, reduced store traffic, and a poorly received ad campaign would result in Q2 EPS lower than the $0.03 initially expected by analysts.

Hotel and casino operator Mirage Resorts (NYSE: MIR) slid $1 1/16 to $17 1/16 after the Nevada Gaming Control Board filed a complaint against the company yesterday alleging Mirage employees improperly collected gambling debts during trips to meet with South Korean patrons. The Nevada regulators are reportedly seeking to levy up to $2.1 million in fines on the company in connection with the trips.

e-Net Inc. (Nasdaq: ETEL) lost $2 7/16 to $13 3/4 after Kaufman Brothers lowered its short-term rating for the telecommunications hardware and software designer to "hold" from "buy."

Analog Devices (NYSE: ADI) slid another $1 3/4 to $19 3/4 after Lehman Brothers lowered its fiscal 1998 earnings estimates to $0.86 per share from $0.93 per share and cut its price target to $26 per share from $28 per share. Yesterday, the maker of integrated circuits reported Q3 EPS (excluding charges) of $0.15, missing analysts' estimates by $0.04.

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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
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