Barnes & Noble Inc. Q3 2008 Earnings Call Transcript

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Barnes & Noble Inc. (BKS)

Q3 2008 Earnings Call

November 20, 2008 10:00 am ET

Executives

Joseph J. Lombardi – Chief Financial Officer

Stephen Riggio – Vice Chairman of the Board and Chief Executive Officer

Mitchell Klipper – Chief Operating Officer

Analysts

Charles Grom – JP Morgan

William Armstrong – C.L. King & Associates, Inc.

David Schick – Stifel Nicolaus & Company, Inc.

Alan Rifkin – Merrill Lynch

David Schick – Stifel Nicolaus & Company, Inc.

Presentation

Operator

Good day everyone and welcome to this Barnes & Noble third quarter 2008 earnings results conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would now like to turn the call over to the Chief Financial Officer, Mr. Joseph Lombardi.

Joseph J. Lombardi

Good morning and welcome to Barnes & Nobles third quarter 2008 conference call. Joining us today are Steve Riggio, Mitchell Klipper and other members of the senior management team. Before we begin I would like to remind you that this call is covered by the Safe Harbor disclosure contained in our public documents and is the property of Barnes & Noble. It is not to be broadcast or used by any other party without the prior written consent of Barnes & Noble.

This morning before the market opened, we released our results for the third quarter ending November 1, 2008. Consolidated sales totaled $1 billion 123 million for the quarter, a 4.4 % decrease compared to last years 5.7 % increase.

Sales at Barnes & Noble stores were $971 million for the quarter, down 4.4 % over a year ago. Comparable store sales declined 7.4 % for the quarter, which was lower then guidance, which called for a decrease in the low single digits.

Store traffic was down throughout the quarter continuing a trend from earlier in the year. Our average ticket was slightly up this year until midway through the third quarter, when our average ticket began to decline albeit moderately.

Sales at barnesandnoble.com were $109 million for the quarter; a 2 % comparable sales increase on top of last years 14.5% increase. Gross margins declined 30 days this points this quarter however, last years third quarter gross margin included a physical inventory shortage benefit. Excluding the benefit from last year gross margins increased from 29.3 % to 29.9 % this quarter.

With a 7.4 % comparable stores sales decline our gross margins are pressured, as it is difficult to leverage fixed occupancy costs, which are included on our gross margin line. As was the case in the second quarter we continued to see margin benefits in two areas; first, greater through put and usage of our distribution center network and second, reduced markdowns as a percentage to sales.

Selling and administrative expenses include two charges recorded this quarter an $11.6 million pre-tax asset an impairment charge, and a previously announced pre tax charge of $3 million related to a management resignation.

Excluding those charges our selling and administrative expenses were essentially flat with last year at $304 million despite 19 net new store openings since then. The company has recorded an asset impairment charge during the fourth quarter in each of the last three years. This year impairment indicators warranted recognition of a charge in the third quarter. As a result, we determined that the asset carrying value in certain of our stores exceeded the anticipated future cash flows and the charge was recorded in the third quarter.

The company reported a net loss of $0.34 per share including the asset impairment charge of $0.13 per share and the management resignation charge of $0.03 per share. Excluding those charges, net loss per share was $0.18 compared to guidance for a loss per share of $0.10 to $0.15. At quarter end the company’s balance sheet and financial condition remain in excellent shape. Inventories declined $107 million or 6.5 % this quarter, compared to last year despite 19 net new store openings and the sales short fall.

The company had borrowings of $127 million at quarter end or $110 million net of cash. Our seasonal borrowing peaked last week at $200 million and we are forecasting year end cash balance of $150 to $200 million and no debt.

While we were disappointed with our sales performance, we believe that much of our comparable stores sales decline has to do with external economic forces. We are however very pleased with three accomplishments in areas of our business we can control.

First, we maintained and controlled our store expenses, particularly store payroll, while delivering outstanding customer service. Second we reduced our inventory quantities while maintaining quality and selection. And finally, we increased gross margins through relentless pursuit of improving supply chain efficiencies and maintaining our focus on promoting profitable top line sales.

Now we’d like to talk about fourth quarter and full year guidance. While it is difficult to forecast sales in any certainty in the current retail environment, the company is reducing its full year sales and earnings forecast based on the negative sales trends to date. For the fourth quarter, the company expects comparable store sales to decline 6% to 9 %. This would result in a decline in full year comparable store sales of about 5% to 6%. Fourth quarter earning per share is projected to be in a range of $1.40 to $1.70. Full year earnings per share is now expected to be in a range of $1.30 to $1.60.

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