Apparently, Harry Potter's magic just isn't going to be enough. Barnes & Noble's (NYSE:BKS) recent dismal forecast might put into question whether booksellers' stocks are worth reading right now.
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 (NYSE:BGP) reported a rather uninspiring quarter last time around, with some fuzzy comments that might have disappointed investors looking for more specific catalysts. It lowered its profit expectations in January and also cited its own loyalty program as a profit drain.
Barnes & Noble and Borders don't just vie against one another; they also compete with low-priced competitor Books-A-Million (NASDAQ:BAMM), as well as online superstore Amazon.com (NASDAQ:AMZN). And although the final installment in the Harry Potter series is going to hit the shelves this summer, the companies are expected to offer deep discounts on the book, in hopes of capitalizing on its popularity and bring customers into their stores in hopes that they will then buy other merchandise as well.
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.
Borders is a Motley Fool Inside Value recommendation. Amazon.com has been recommended by Motley Fool Stock Advisor.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy has got your back in Quidditch.
