Barnes & Noble (BKS) profits from Harry Potter magic

Book seller Barnes & Noble Inc. (NYSE: BKS) pulled a rabbit out of its own hat and posted diluted EPS of $0.26 in 2Q 2007 last week. But there is always a catch. $0.12 of those earnings derived from a tax benefit and $0.03 derived from lower than expected costs related to closing a huge distribution warehouse. Net earnings for the quarter were just over $18 million or $0.12 per share. Total sales increased 7.6% to $1.2 billion. In-store sales were up 4.4% while online sales were up 18%. Enjoy these increases while they last. Almost all of the good news is a result of the release of the last Harry Potter installment. Barnes & Noble sold just over 2 million copies of the title as of early August. Without Harry Potter, sales increased barely 1%.

Bricks and mortar book stores are a mature business. Possibilities for growth are very hard to come by. CEO Steve Riggio admits as much even while trying to sound upbeat about 3Q releases planned by former President Clinton, former Fed Chair Greenspan and musician Eric Clapton. No offense to these gentlemen, but Harry Potter they ain't. 3Q store sales are forecast to be flat with a loss per share of $0.06-$0.10. Barnes & Noble also posted losses in 1Q, so an increase in FY guidance to $1.69-$1.87 from $1.49-$1.67 is puzzling. Perhaps management is expecting a huge 4Q surge in book buying for the December holidays. Guess they missed the recent report stating 25% of adults surveyed in the U.S. read ZERO books the previous year.

The company is still buying back its shares, adding 500,000 repurchased shares in 2Q to the 750,000 shares repurchased in 1Q. Barnes & Noble has budgeted $400 million for stock buy backs. The stock is surprisingly volatile. It began the year trading at $40.29, hit $42.88 in May, but closed at $35.80 on 27 August. By all means, shop at Barnes & Noble, but spend investment dollars elsewhere.