Barnes & Noble, Inc. Earnings: Will Books or Nooks Save the Stock?

On Wednesday, Barnes & Noble (BKS) will release its quarterly report, and shareholders have renewed hope that the long-ailing bookseller can continue to turn its fortunes around and become profitable. Despite ongoing pressure from online rival Amazon.com (AMZN 1.30%) both in its core book business and in the tablet arena, Barnes & Noble appears to have found a path to potential success, even though major shareholder Liberty Media (FWONA) sold off a big portion of its overall holdings in the company.

Barnes & Noble came to prominence on the strength of its brick-and-mortar bookstores, which helped to revolutionize what until then had been an industry composed mostly of small mall-based chain stores and larger local bookstore businesses. But as Amazon's online book business took off, it hurt sales at Barnes & Noble and other physical bookstore chains, sending one into bankruptcy and leaving many investors believing that Barnes & Noble would follow in short order. Yet Barnes & Noble has fought back by emphasizing the value of its store network. Let's take an early look at what's been happening with Barnes & Noble over the past quarter and what we're likely to see in its report.

Source: Motley Fool.

Stats on Barnes & Noble

Source: Yahoo! Finance.

Can Barnes & Noble earnings keep improving?
In recent months, investors have gotten a lot more optimistic about Barnes & Noble earnings, reversing initial expectations for a loss in the 2015 fiscal year to project a profit instead. The stock has fallen 2% from its late-March levels, but it has recovered substantially from a more significant drop in April.

Barnes & Noble's fiscal third-quarter earnings report in late February showed the extent to which the company has had to deal with declining fundamentals. Revenue fell about 10% from year-ago levels, with 6% drops in its core retail and college textbook businesses showing relative strength compared to the 50% plunge in Nook-division sales. Operating income almost tripled, but only because Barnes & Noble managed to minimize the rate of cash burn from Nook, and even though the bookstore division fared reasonably well, comparable bookstore sales still dropped 0.5%.

But the real damage to investor sentiment came in early April, when Liberty Media announced that it had sold off almost all of its preferred-stock investment in Barnes & Noble. Back in 2011, Liberty Media invested about $200 million in exchange for preferred shares representing about a 17% stake in the company, and many had seen Liberty Media's contribution as crucial to Barnes & Noble's recovery strategy. When Barnes & Noble founder and board chairman Leonard Riggio made a big sale of his own later that month, reducing his holdings to about 20%, the loss of confidence was palpable.

Still, Barnes & Noble has worked hard to change its identity to return to its roots. The company has lobbied for online sales taxes, trying to attack a key competitive advantage Amazon has. Moreover, attempts to capture a bigger portion of the lucrative college textbook market have borne some fruit for the company. Some analysts have concerns that physical textbooks will give way to electronic-format materials, once again thwarting Barnes & Noble's long-term strategy and inviting e-commerce competitors to take away that opportunity as well.

Many investors believe the best strategy for Barnes & Noble at this point is to formally break up its business and separate the Nook division from the rest of the business. Nook is completely unprofitable, yet the company is still working on releasing new tablets to try to compete against Amazon and other mobile-device players. Given the lack of synergy within Barnes & Noble's businesses, the bullish argument favors letting the two halves of the company go their separate ways and make the most of their own individual profit potential.

In the Barnes & Noble earnings report, watch to see if the company gives any long-range strategic vision about its future. Until the situation with Nook is resolved, the dissonance between the two major parts of Barnes & Noble's business could continue to hold shares back from the biggest possible gains even if the overall company does become profitable next year.

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