Burns and Noble

Shares of Barnes & Noble (NYSE: BKS  ) opened sharply lower today, after the bookstore chain warned of a larger loss this fiscal year and is considering spinning off its cash-sucking Nook business.

There was some good news in this morning's announcement, too, but let's go over the items that are making this morning's news as savory as The Help's chocolate pie.

Barnes & Noble is now bracing investors to expect just $150 million to $180 million in EBITDA for its fiscal year ending in April. Just a month ago, the retailer was targeting EBITDA of $210 million to $250 million. The margin chomping is coming at the expense of weaker-than-expected sales for its entry-level Nook Simple Touch e-reader and promotional expenses in growing its Nook business.

The superstore chain is now targeting a loss between $1.10 a share and $1.40 a share, well off the $0.63 a share deficit that analysts were projecting.

The market is also reacting to Barnes & Noble's decision to explore a potential separation of its Nook business. Splitting the two operations isn't a ludicrous notion. Nook sales are booming, but that growth is coming at a heavy bottom-line cost. The company's flagship retail business is struggling -- despite a robust holiday season -- but at least it's profitable.

However, you can never fathom Amazon.com (Nasdaq: AMZN  ) spinning off its Kindle business as a stand-alone operation, even though it is also a drag on Amazon's financials. The key difference is that Amazon is still ultimately profitable, and it remains to be seen whether Barnes & Noble will ever be able to crank out an annual profit given the way it has to price its Nooks competitively.

I promised some good news, and it comes largely in the form of brisk holiday sales. Physical book sales on a comparable basis increased for the first time in five years. The summertime liquidation of longtime rival Borders obviously had an impact here. A dip next year is probably in the cards. However, the fact that store sales during the nine-week holiday period increased 2.5% -- with comps growing even better -- show that the retail concept isn't going down without a fight.

Liberty Capital (Nasdaq: LMCA  ) -- which acquired a significant stake in Barnes & Noble after passing on an outright buyout -- surprisingly opened higher today. Perhaps investors are thinking that John Malone will now have a shot at gobbling up the Nook business that he was interested in all along, but that seems unlikely.

Nook is a dog on the bottom line but it's barking a good game. Nook units experienced a 70% uptick in sales during the past two months, and digital content sales soared 113%.

Like Amazon, Barnes & Noble isn't breaking out actual unit metrics. However, telling the market today that it's expecting $450 million in digital content sales this fiscal year as part of a $1.5 billion Nook business, a little better than $1 billion outside of digital content implies that there will be millions -- probably in the range of 5 million -- of Nook devices across all three categories sold this year.

Sure, it's a far cry from Amazon selling more than a million Kindles per week lately, but the Nook is clearly a contender.

What will it take to make this contender profitable? If Barnes & Noble knew, its stock wouldn't be taking a beating today.

The popularity of e-readers, smartphones, and tablets opens the door for some surprising Wall Street beneficiaries. Read up on three hidden winners in a free report. If you wait for the report to show up on your Nook, you may be too late to the party so check it out now.

The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz does not own shares in any of the other stocks in this story, except for Liberty Capital. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On January 05, 2012, at 11:00 AM, Sparticus501 wrote:

    The demise of the Nook will only boost the AMZN Kindle. AMZN is thinking long term, which not enough companies do these days, by offering the Kindle at a discount it caputres a large amount of long term market share. AMZN is the clear long term winner of this fight.

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