Cost-Conscious Consumers Put Drag on Sales

Customer traffic remained weak in the second quarter, and shoppers who made it into stores continued to be very price sensitive, executives at Barnes & Noble and Books-A-Million said in conference calls discussing second-quarter results. B&N CFO Joe Lombardi said floor traffic was slow throughout the quarter with no significant changes from month to month (May, June, July). As a result, the average sales ticket was down slightly for the quarter. At BAM, traffic was also soft, which led to slow sales of hardcover bestsellers and higher sales of bargain and gift books, Terry Finley, president of BAM merchandising, said. Core book sales remained challenged in the quarter, Finley added. Bargain and gift books also did well at B&N, and the retailer's gross margin was helped by fewer bestsellers as a relatively few number of books—The Host, Audition and The Last Lecture—did extremely well, Lombardi said. B&N's margins also benefited from lower returns, continued low shrinkage and reduced promotional costs, Lombardi added.

B&N is limiting its store openings this year and only opened one outlet in the quarter compared to 10 last year. The good news on the real estate front is that the chain has been able to successfully renegotiate better deals on the 87 leases coming up for renewal in 2010, and COO Mitch Klipper said landlords are “very, very anxious” for B&N to commit to renewing leases up in 2011. BAM has been aggressively opening stores over the past 12 months, including two in the quarter; at the end of the period, BAM had 223 stores compared to 212 outlets a year ago, and the new stores helped to offset the 4.9% decline in same store sales.

Lombardi used the conference call to address B&N's pending purchase of Barnes & Noble College Booksellers, which has drawn criticism from analysts and investors and one lawsuit. Lombardi said B&N expects the college division's EBITDA to grow at a compound annual growth rate of 4% to 5% for the next five years, the same rate B&N College grew at over the last two years. The company generally adds $60 million in new business annually while losing $15 million in contracts, and with more than 2,000 colleges still operating their own stores, Lombardi see plenty of room for growth. Analysts are concerned that as digital textbooks replace print texts, college bookstores will be cut out of a significant portion of business.

Barnes & Noble, Second-Quarter Results
($ in millions)

Books-A-Million, Second-Quarter Results
(In millions)