$1.22. $1.34. $1.49. $1.66. $1.54. Those are the profits that analysts predicted Barnes & Noble (NYSE:BKS) would earn in the fourth quarters of the last five years. And how did Barnes do at meeting those estimates? Not half bad. It met expectations twice, beat them twice more, and missed only once. So when the company reports earnings tomorrow morning, odds favor that it will at least hit Wall Street's hoped-for $1.75 in Q4 profits. If it does or doesn't, that doesn't necessarily mean the company is doing well (or badly). For that, you need to know the context.

Wall Street Wisdom:

  • General consensus. Eight analysts follow Barnes. Of these, one rates the stock a buy, two a sell, and five more a hold.
  • Revenues. Do analysts have "wandering eyes?" You have to wonder when you see that they're predicting 3.4% sales growth for tomorrow -- the same number that the folks tracking Borders (NYSE:BGP) predicted for their company. $1.73 billion is Barnes' magic number.
  • Earnings. With the estimate standing at $1.75, profits for the quarter are expected to rise 15% versus Q4 2004.

Margin watch:
Across the board, Barnes is still posting better margins than its rival, Borders. But just like Borders, its margins are falling. Rolling gross margins are down 160 basis points over the past 18 months. Operating margins are down 40 basis points, and the net is down 110 points -- making the company 28% less profitable now than it was a year and a half ago.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

32.2

33

30.5

30.7

30.6

30.6

Op.

5.5

5

5.1

5.1

5

5.1

Net

3.9

4.1

2.9

2.9

2.9

2.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
In contrast to Borders, Barnes' management sounded pretty upbeat in its earnings report four months ago. It even declared its first-ever dividend of $0.15 per share, which has since been repeated. Despite the company's margin erosion, Barnes has good reason for its optimism. While sales growth of 5% is not exactly a barn-burning pace, we've seen Barnes reduce its inventory levels in each of the past two quarters, while Borders' have risen. That's a good thing, and I'd expect it to expand Barnes' margin edge over Borders in quarters to come. Borders will have to discount prices to move unsold inventory. Barnes won't.

Fool contributor Rich Smith has no interest, short or long, in any company named above.