Apparently, Harry Potter's magic just isn't going to be enough. Barnes & Noble's
Barnes & Noble threw investors for a loop when it said it will report earnings of $1.65 to $1.80 per share in 2007, or $1.49 to $1.67 per share counting charges for distribution-center closures and legal fees. That's far lower than the $2.20 to $2.30 per share it is expected to report for the most recent year, and lower than the $2.41 per share that analysts anticipated in 2007.
It's dismal, all right, but it's probably not shocking. A price war has been brewing amongst bookish retailers. Last quarter, in a bid to keep its customers, Barnes & Noble said it was lowering prices on hardcovers aimed at adults for shoppers participating in its membership program . Meanwhile, rival Borders
Barnes & Noble and Borders don't just vie against one another; they also compete with low-priced competitor Books-A-Million
I haven't felt tempted by the booksellers' stocks. Borders is about to report an earnings decline for the second consecutive year, yet its P/E ratio is far higher than Barnes & Noble's. (Granted, it's expected to report a big increase in earnings for the year ended January 2008, but given the competitive landscape and Barnes & Noble's outlook, one might wonder how the coming year will transpire.) Furthermore, the last time Borders reported positive free cash flow was the year ended January 2005. At least Barnes & Noble generated $312.5 million in free cash flow in fiscal 2006, although we don't have much color on its recent free cash flow generation, since Barnes & Noble hasn't filed a recent 10-Q because of its investigation into stock-option practices.
That said, I'm not any more attracted to Barnes & Noble than I am to Borders at the moment. Although Barnes & Noble shares dropped 11.5% Monday on its forecast, it doesn't seem like a bargain given the lower profit for the year and the cutthroat competitive landscape. If not even Harry Potter can infuse magic into the outlook, I think it's best to leave these stocks on the shelf for now.