It's the moment many people -- not to mention the major booksellers -- have been waiting for. The next Harry Potter installment, Harry Potter and the Deathly Hallows, is slated for release in July, and already there's been a flurry of activity. Booksellers are offering preorders, and Barnes & Noble (NYSE: BKS) got an analyst upgrade today.
Ever since J.K. Rowling's first Harry Potter book became a smash hit, subsequent releases have been heralded as huge events for booksellers. It's hard to find a good comparison for this kind of mainstream pop-culture event in the book world, unless it's the kind of costumed fanfare that used to accompany opening nights for, say, the Star Wars movies.
Last week, Amazon.com (Nasdaq: AMZN), Barnes & Noble, and Borders (NYSE: BGP) were quick to offer preorders of Harry Potter and the Deathly Hallows as they announced the book's launch on July 21. Interestingly, Scholastic (Nasdaq: SCHL), the U.S. publisher, upped the book's price to $34.99, a $5 increase over previous books in the series. But as you might expect, all three major booksellers are offering deep discounts to excited fans, in the hope that consumers will snap up other books and items in their Harry Potter fever. Making money on the book itself may not be part of the equation, but wooing bewitched customers into stores -- or virtual storefronts -- is.
The magic happened quickly, too -- Amazon said that first-day preorders increased more than 500% from last time around. That's pretty good, considering the book won't even be available until summer, yet it's also not terribly surprising, given the demographic-spanning power of this series.
Further, an analyst over at Prudential has upgraded Barnes & Noble's stock, in part because of Harry Potter's imminent arrival. That move underlines an important element to remember about the booksellers: Although they're not really "cyclical" per se, big blockbuster hits can really boost their sales and earnings potential, and they can likewise present tough comparisons when there's a dearth of such across-the-board hits.
There may be more reason than ever for investors to tread carefully, though, especially for those who are looking at the long term. When I reviewed last quarter's earnings at both Barnes & Noble and Borders, I noted that each reported comparatively lackluster quarters. And it's notable that this is the last Harry Potter book in the series. Booksellers won't be able to count on Harry's occasional infusion of magic anymore.
Keeping in mind that it's a very competitive industry, I found Barnes & Noble more attractive than Borders upon recently looking at both. Borders has had some difficulties drumming up growth recently, yet its stock is trading at what seems like a lofty price-to-earnings ratio -- it's got a trailing P/E of 33 and a forward P/E of 26, while Barnes & Noble's are in the high teens. Meanwhile, red flags went up for me when I realized that Borders' free cash flow has been in negative territory recently. And of course, things looked a bit rough at Borders last quarter, judging by its wider loss, slipping gross margin, rising interest expense caused by higher debt levels, and higher sales, general, and administrative expenses. Borders has some work to do.
Although the short term looks bright for the booksellers, given the imminent arrival of Harry's final chapter, there's a lot for investors to contemplate when it comes to booksellers' long-term outlook. Harry Potter may be magic, but this spell doesn't last forever.
Crack open a few Foolish articles about Borders and Barnes & Noble:
- Borders is trying to gather shoppers.
- Take a look at our take on last quarter at Borders.
- And here's more about Barnes & Noble's most recent quarter, too.
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Alyce Lomax does not own shares of any of the companies mentioned.
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