Barnes & Noble Inc. (NYSE: BKS) surprised Wall Street today by reporting quarterly earnings that did not suck as bad analysts expected, mainly because it was able to control costs. The question is whether this is sustainable.

Net income at the world's largest bookseller fell to $15.4 million, or 27 cents a share, from $18.05 million, or 26 cents, a year earlier. Sales dropped 1.6% to $1.2 billion from a year earlier when J.K. Rowling's Harry Potter and the Deathly Hallows was flying off the shelves. Barnes & Noble store sales decreased 1.6% to $1.1 billion, with comparable store sales decreasing 4.7%. Barnes & Noble.com sales rose 3.6% to $99.8 million.

Excluding a one-time tax benefit, profit was 15 cents, five cents ahead of the 10-cent average estimate of analysts surveyed by Bloomberg. It was also higher than the company's guidance of 8 cents to 13 cents a share. Gross margins were stronger because of the greater utilization rates of its distribution centers and a lower markdown rate. Selling and administrative expenses fell in the quarter.

Of course, Barnes & Noble will continue to struggle as consumers cut back on their discretionary purchases. Moreover, Amazon.com Inc. (NASDAQ: AMZN) is not going anywhere soon. The company expects to lose 10 to 15 cents in the third quarter. It also lowered its full-year comparable same store sales guidance from "slightly negative to a decrease in the low single digits." The company is maintaining its full-year earnings guidance of $1.70 to $1.90.

At this rate, the company may be able to ride out the economic downturn until it can find a private equity buyer which is about the only hope for shareholders.

Russian business runs on different rules. News Corp.'s (NYSE: NWS) Rupert Murdoch, who has been doing business in China for years, is nervous about his Russian enterprises. This morning, the FBI announced it had rounded up a ring of data thieves, many from former Soviet Union countries. And then there's the little matter of BP-TNK, a joint venture between BP (NYSE: BP) and a Russian company, whose Russian shareholders are booting out its Western executives so they can take over the operation.

Here's what Silicon Alley insider reports Murdoch had to say about doing business in Russia: "We have great growing business there but just -- this is purely me, I'm sorry, I'm -- the more I read about investments in Russia, the less I like the feel of it. The more successful we'd be, the more vulnerable we'd be to have it stolen from us, so there we sell now."

In case you missed it, The Detroit Free Press reports that an international ring of data thieves used wardriving -- the practice of stealing data from unprotected Wi-Fi networks -- to take 40 million identities, use the information to print fake ATM cards, and steal millions of dollars. The corporate victims include customers of TJX (NYSE: TJX), Barnes & Noble (NYSE: BKS), and OfficeMax (NYSE: OMX). Five of the 11 defendants are from former Soviet Union countries -- "one is from Estonia, three are from Ukraine, and one is from Belarus."

The Wall Street Journal reports (subscription required) of upcoming releases this summer such as Andrew Davidson's The Gargoyle, New York Times reporter David Carr's memoir The Night of the Gun, and Ron Suskind's The Way of the World: A Story of Truth and Hope in an Age of Extremism.

There's a separate article on the release of Stephenie Meyer's book Breaking Dawn, which The Journal calls a "vampire romance novel." Borders Group (NYSE: BGP) said it has sold 250,000 copies in the first 24 hours following the book's release.

That's an impressive number, and it may be some cause for hope for shareholders who have taken a beating in booksellers like Borders, Barnes and Noble (NYSE: BKS) and Books-a-Million (NASDAQ: BAMM).

But don't get too excited. Since the first American edition of the first Harry Potter book in October of 1998, shares of Scholastic (NASDAQ: SCHL), a specialty publisher of children's books, have gone from around $20 per share to their current price of $26 -- a gain of 30% over the course of a decade. Not exactly something to get excited about, especially considering it's one of the bestselling books of all time, ever.

The bookstores might get a temporary jolt from late sumer and fall hits, but the long-term fundamentals of the industry will drive results. A new CD from Eminem -- or even The Beatles for that matter -- wouldn't be enough to save a company like Trans World Entertainment (NASDAQ: TWMC). For bookstores, that means the lower prices and wider selection of Amazon.com (NASDAQ: AMZN), or conveniences of stores like Wal-Mart (NYSE: WMT), as well as the onset of digital delivery are the factors investors have to look at.

And even vampire romance novels can't compete with those.

When it comes to companies lacking in any kind of strategic direction, it's hard to top Border Group (NYSE: BGP). In the midst of its efforts to sell itself, Borders recently launched its own e-commerce site to compete with better-financed, and just plain better, rivals like Amazon.com (NASDAQ: AMZN) and Barnes and Noble (NYSE: BKS).

Browsing NewYorkTimes.com this morning, I noticed a banner ad for "the new Borders.com: Free shipping on orders over $25."

Man, that should do a lot to lure customers away from Amazon and Barnes & Noble. Oh, wait. No it won't, because both of those sites offer exactly the same deal. And, just to add insult to injury, so does Books-A-Million (NASDAQ: BAMM).

Basically, Borders has a weak balance sheet and, in the midst of its efforts to put its shareholders out of their misery with a sale, is blowing money on capital expenditures that will give the company the same service as competitors: meaning that most strategic buyers won't pay any extra for the e-commerce site.

The stock's low price has attracted brilliant investors like William Ackman, but given that the company is continuing to make value-destroying decisions, I don't think it's a stock investors should go near.


More Borders coverage:
Does Borders have any idea what it's doing?
Borders goes digital
Borders is for sale
Why would Barnes & Noble buy Borders?

MAJOR PAPERS:

• Barnes & Noble Inc (NYSE: BKS) is considering a bid for rival bookseller Borders Group Inc (NYSE: BGP), the Wall Street Journal reported, a move which would allow Barnes & Noble to improve profits and reduce costs. Antitrust issues could prevent a deal.
• The Wall Street Journal also reported that Carl Icahn's effort to remove Yahoo! Inc's (NASDAQ: YHOO) board has picked up new supporters, including T. Boone Pickens, who acquired a 0.75% stake. Some Yahoo shareholders believe it is still too early to predict whether Icahn will be able to carry July 3's shareholder vote.
• A Financial Times investigation discovered that Moody's Corporation (NYSE: MCO) incorrectly awarded top ratings to billions of dollars to debt products due to an error in its computer models. Moody's said it is in the process of "conducting a thorough review" of the rating of the constant proportion debt obligations, which should have been up to four notches lower.

OTHER PAPERS:

• According to the people briefed on the matter, the New York Times reported that the buyout of Penn National Gaming Inc (NASDAQ: PENN) by Fortress Investment Group (FIG) and Centerbridge Parters may involve revised terms. The sources said the negotiations may "delay or even imperil" the deal.

Borders Group, Inc. (NYSE: BGP), the arch-rival of bookseller Barnes & Noble, Inc. (NYSE: BKS), is struggling mightily. It may not go away, but it seems that there's a good chance that it will continue its business imperatives under new owners. According to a press release issued by the company, as well as this AP article, the company appears to want to sell itself at this point because, to be blunt, management appears to have failed at its job of preserving and growing shareholder value; it also has failed against online entities such as Amazon.com, Inc. (Nasdaq: AMZN) and other retailers such as Wal-Mart Stores, Inc. (NYSE: WMT). Why, as I write this, the stock is down 39%, and it is below $5 per stub. Yikes! I've been feeling pain with some of my financial stocks lately, but I feel bad for Borders shareholders, that's one torturous drop in value.

The retailer just isn't doing well; in fact, it decided to drop its dividend payout because it no longer can afford it. I'm sure shareholders were expecting such a move, but when it happens, it's always such a slap in the face. Borders is having cash issues, management doesn't seem to be confident in its current business structure, it missed earnings estimates, revenues are down, etc. Funny thing is, I actually prefer the shopping atmosphere of my local Borders store over my local Barnes & Noble outlet. Can't always go by personal experience, I guess.

Well, if one wants to speculate, one could buy some lottery tickets -- I mean, shares -- in Borders Group. I won't. Yes, catalysts could come down the line for the company, but for now, the market seems to be telling investors that this is one to stay away from.

Disclosure: I don't own any of the companies mentioned here; positions can change at any time.

To be honest, I'm not a big fan of chain bookstores. First off, my cousins own a large independent bookstore in Massachusetts, and, as long as business is good for them, my big "family discount" is safe. However, beyond my personal connections, I don't really like the way that chain bookstores control access to titles, artificially control the bestseller lists, and squeeze out independent booksellers. Frankly, it just creeps me out.

That having been said, I kind of like Barnes & Noble, Inc. (NYSE: BKS). They tend to have a good selection of bargain books, usually offer patrons some nice spaces to sit and read, and generally have a pretty broad selection. Because of this, I was a little alarmed as I watched their stock take a little tumble this week. Based on its own predictions that this year's profits will fall well short of forecasts, B&N experienced a 5% drop in value to $26.95. As of this writing, it's currently trading at $26.26.

Part of this isn't Barnes and Noble's fault. First off, without a new Harry Potter book coming out this year, every bookseller is going to have massively diminished revenues. Additionally, I imagine that book revenues will drop as many readers, facing diminished money for luxury expenditures, will rediscover the wonders of their local libraries.

Retail websites are becoming just as important as brick-and-mortar presences for most retailers, and this is never more apparent than during the retail holiday season. For those customers who don't wish to beat each other up while standing in 6am Black Friday lines, sitting at home ordering holiday presents over the web is the preferred shopping method.

I've written many times in the recent past about how consumer electronics retailer Best Buy, Inc. (NYSE: BBY) gets more things right than wrong. The company's merchandise presentation, helpful employees and overall shopping experience is miles ahead of competitor Circuit City Stores, Inc. (NYSE: CC) from my experience. But, how about the performance of its website? I'll admit that I've never ordered a single thing from Best Buy's website. Apparently, I am missing out there.

In a recent study of retail website performance over the recent holiday season, Best Buy was joined with bookseller Barnes & Noble, Inc. (NYSE: BKS) and outdoor retailer Cabelas, Inc. (NYSE: CAB) as having the highest reliability of all retailers in a field of 26 candidates. Other retailers monitored included the world's largest online retailer -- Amazon.com, Inc. (NASDAQ: AMZN), Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT). In terms of specific website performance figures like page downloading and transaction completion speed, retailers Circuit City and Victoria's Secret ranked at the top.

MOST NOTEWORTHY: Komag Incorporated (NASDAQ: KOMG), commercial mortgage REITs, Getty Images Inc (NYSE: GYI) and Rural/Metro Corporation (NASDAQ: RURL) were today's noteworthy downgrades:

• Komag was downgraded to Neutral from Buy at Craig-Hallum, to Market Perform from Outperform at Piper Jaffray, to Hold from Buy at Deutsche Bank and to Neutral from Outperform at Robert W Baird & Co following the announcement it would be acquired by Western Digital Corporation (NYSE: WDC).
  
• Morgan Stanley downgraded Commercial Mortgage REITs to Underweight from Neutral. Specifically, the firm downgraded shares of Capital Trust, Inc (NYSE: CT) to Equal Weight from Underweight and Gramercy Capital Corp (NYSE: GKK) to Underweight from Equal Weight, citing increased credit spreads and subordination levels.
  
• Getty Images was downgraded to Sell from Hold at Matrix as the firm believes margins are declining and sees downside to their $40/share intrinsic value calculation.
  
• Rural/Metro was downgraded by Ferris, Baker Watts to Neutral from Buy on valuation.

OTHER DOWNGRADES:

• PMI Group Inc (NYSE: PMI) was downgraded to Neutral from Buy at UBS.
  
• Deutsche Bank downgraded Palm, Inc (NASDAQ: PALM) to Sell from Hold.
  
• BMO Capital downgraded shares of Carrizo Oil & Gas Incorporated (NASDAQ: CRZO) to Market Perform from Outperform.
  
• Morgan Stanley downgraded shares of Cemex (NYSE: CX) to Equal Weight from Overweight.
  
• Barnes & Noble Inc (NYSE: BKS) was downgraded to Hold from Buy at Matrix.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

While the upcoming release of the seventh and final volume in the Harry Potter series will certainly give a boost to Scholastic's (NASDAQ: SCHL) bottom-line, don't expect booksellers to get the benefit. Deep discounts at retail will make it difficult for many bookstores to make a dime on "Harry Potter and the Deathly Hallows".

Amazon (NASDAQ: AMZN) has the title available at 49% off its $34.99 cover price and Barnes and Noble (NYSE: BKS) has it at 40% off. Competing against deals like those, many mom and pop shops are frustrated. There's little they can do with Harry Potter except sell it for around what they pay for it and use it as a loss-leader, hoping that people who buy it will buy other books too. Some even grumble that it will be cheaper for them to go buy it at a discounter like Wal-Mart (NYSE: WMT) than to order it from the publisher.

Of course, the problem is not limited to Harry Potter. With sites like Amazon discounting nearly every title in stock, bookstores, including Borders (NYSE: BGP) are struggling. They may need to take a look at bars for inspiration.

Think about it. On Friday nights, most bars are packed, even though people could have a bottle of wine at home for the same price they will pay for a glass or two in the bar. The reason? The bar is providing something intangible (OK, maybe it is just a place to meet people of the opposite sex, and I'm not suggesting Borders should turn itself into a hook-up spot) that makes people willing to pay more.

The numerous events that stores are holding -- parties and the like -- will help draw people in to overpay for their copy of Harry Potter. But Harry Potter aside, these stores have to find some way to add value in a way that the internet can't if they are going to survive. They can't compete with Amazon on price, but maybe they can offer something more important.

This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and watch out for more Battle of the Brands posts.

So let's imagine that you like the convenience of shopping attired only in your underwear. In this (purely hypothetical) case, which site, Amazon.com or Barnes & Noble.com, would be your first choice?

With over 40 product categories ranging from books and DVDs to pet food to health and beauty products, there is something for just about everyone on Amazon.com (NASDAQ: AMZN). The site contains your browsing history, which can be either good or bad depending on who's looking over your shoulder when you next log in. Amazon offers 1-click check out once you set up an account, and also offers incentives to consumers who use Amazon's own credit card. Orders over $25 ship free to continental U.S. addresses. Amazon provides plenty of graphics of book and DVD covers, so even if you can't remember the name of the item, you might be able to recognize it from its picture. Amazon also offers a simple order tracking option called Where's My Stuff.

Barnes & Noble (NYSE: BKS) offers a narrower range of products, mainly books, DVDs, and vaguely educational toys. Books are new and used mass market, as well as new and used textbooks. The site is much less graphics intensive than Amazon, but holds more information on titles. Barnes & Noble also offers incentives for customers to use its own credit card and to join its membership program in exchange for discounts. Shipping is free on most orders over $25. Payment is via Paypal. Unlike Amazon, Barnes & Noble includes an 800-help number on the web page. Barnes & Noble targets more serious readers with weekly online book club meetings in which various authors participate in the discussion and Q&A about their books.

So, clad in whatever manner makes you comfortable, what is your preference for online shopping?

Be sure to vote in our poll for B&N or Amazon as your preferred brand, and lets us know why you love it in the comments. Results of all Battle of the Brands match-ups coming soon.

Borders Group Inc. (NYSE:BGP) has finally woken up and smelled the overpriced coffee.

The book retailer is dramatically scaling back its brick-and-mortar operations and is focusing on the Internet. Too bad for shareholders this is 2007 and not 1999. I am not sure how much patience Wall Street has left for Borders. Perhaps the company would do better in private hands.

Shares of Borders are down 9% over the past five years, under-performing Barnes & Noble Inc. (NYSE:BKS) which rose 20% and Amazon.com (NASDAQ:AMZN), up 184%. The company also faces stiff competition from other rivals including Costco Wholesale Corp. (NASDAQ:COST) and Wal-Mart Stores Inc. (NYSE:WMT).

The turnaround plan Borders announced is smart.

It's ending its alliance with Amazon and launching its own e-commerce site next year. The company will sell or franchise its superstores overseas and will close nearly half of its Waldenbooks outlets in the U.S., according to the Wall Street Journal [subscription required]. Borders also will sign more deals with best-selling authors and celebrities to beef up its proprietary publishing operation, the paper said.

Still, the future is very uncertain for Borders.

Today the retailer reported a fourth quarter net loss of $73.6 million, or $1.25 per share, compared with profit of $119.1 million or $1.78, a year earlier. Revenue rose 2 percent to $1.5 billion. Excluding charges profit was $1.61. Analysts were expecting profit of $1.63 on revenue of $1.48 billion, according to Thomson Financial.

Investors are going to want to see improvement pretty quickly.

Barnes & Noble Inc. (NYSE:BKS) recently released 4Q 2006 and FY 2006 earnings reports, neither of which contained much good news. The outlook for 2007 isn't that rosy either. Barnes & Noble store sales were $1.5 billion for 4Q, $4.5 billion for FY 2006. That was a modest 2% increases in sale, with slight decreases in comparable store sales. B. Dalton book store sales were $36 million for 4Q, $102 million for the year, a whopping 30% decrease for the quarter, and 29% for the full year. Much of the decrease is a result of closing 20 stores during 2006. BarnesandNoble.com online sales were $164 million for 4Q, $433 million for the year. Even as more and more consumers move to online retailing, BarnesandNoble.com showed a 1% decrease for the year. Overall, sales were $1.9 billion for 4Q, and $5.3 billion for the year.

Trying to turn things around, Barnes & Noble has decided to close its book distribution center in Memphis, TN. All internet orders will be processed and fulfilled either at Monroe, New Jersey or Reno, Nevada. The closing will eliminate 200 jobs, but still cost close to $5 million, or 7 cents per share, in 2007. Analysts remain disappointed in Barnes & Noble. Analysts were predicting $2.42 EPS for 2006. Barnes & Noble had predicted closer to $1.86-1.96 EPS for 4Q, and $2.20-2.30 EPS for the full year.

Barnes & Noble stock has taken a hit as a result of the lower than expected earnings. Currently the stock is trading at $37.39.

Long-time writer for Barron's, Jonathan Laing, takes an deep-dive on the shares of Barnes & Noble, Inc. (NYSE:BKS).

Books are dead, right? It's all about the Internet?

Maybe. But Laing thinks BN is an ideal candidate for a buyout.

Despite a nice rally in stocks, Barnes & Noble has been a laggard. Other problems: analysts are lukewarm on the stock; Amazon.com is a threat; there is slowing consumer spending; and there is also stock option backdating concerns.

However, smart money is moving into the stock, such as from the hedge fund Pershing Square. It holds about 8% of the Barnes & Noble.

Pershing's superstar investor, Bill Ackman, likes Barnes & Noble because: the aging population bodes well for books; BN has a massive superstore footprint, which provides a Starbucks-like social experience; there is little inventory risk (because books can be returned to the publisher); and the brand is very powerful.

Also, Barnes & Noble has taken steps to restructure the cost structure and boost cash flows, offering more high-margin products (such as wrapping paper), and providing self-publishing services.

And, with no debt -- as well as the strong cash flows -- Barnes & Noble would certainly make for an attractive leverage buyout from a private equity group.

Actually, there may not be any need for private equity financing. Given the company's balance sheet and the founding family's equity stake, the deal could be done completely with debt financing.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.