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Barnes & Noble Up to Strong Buy on Solid Q3

Zacks Equity Research

On Mar 1, 2014, Zacks Investment Research upgraded bookstore giant, Barnes & Noble, Inc. (BKS) to a Zacks Rank #1 (Strong Buy) on solid third-quarter fiscal 2014 results.

Why the Upgrade?

On Feb 26, Barnes & Noble reported better-than-expected third-quarter fiscal 2014 results beating the Zacks Consensus Estimate for both revenues and earnings.

In the quarter, the company reported earnings of 86 cents per share, far ahead of the Zacks Consensus Estimate of 50 cents. However, the earnings included a one-time benefit from a deferred tax valuation allowance.

Excluding the benefit, earnings stood at 24 cents, which was still significantly better than loss of 14 cents recorded in the prior-year quarter. Strong margins due to cost reduction in the NOOK segment led to the solid earnings performance.

Barnes & Noble operates through the Retail segment (which consists of Barnes & Noble bookstores and e-Commerce website, BN.com), College Booksellers segment (consists of bookstores in colleges and universities across the U.S.) and NOOK segment (which include sales of digital content, devices and accessories).

Though declining 10.3% year over year, revenues of $1.99 billion beat the Zacks Consensus Estimate of $1.98 billion. Improved core comparable bookstore sales trends in the retail segment (accounting for approximately 70% of volume growth) compared to the first half, led to the better-than-expected sales performance. A strong line-up of best-selling titles, growth in educational toys and games and a successful advertising campaign resulted in the better comps.

Consolidated EBITDA soared 191.3% to $173.1 million driven by significantly narrowed losses at the NOOK segment due to cost reductions. NOOK EBITDA loss narrowed 68% in the quarter as the company sold through and converted most of its existing device inventory into cash while lowering expenses. The company lowered device, advertising, payroll and consulting costs which led to higher profits at NOOK.

Barnes & Noble is taking steps to rationalize its NOOK segment which has been a drag on the company for quite some time. The restructuring and strategic initiatives played a role in controlling losses in the segment.

Estimates were largely revised upwards after Barnes & Noble announced the strong third-quarter results. The Zacks Consensus Estimate for fiscal 2014 narrowed from a loss of $1.25 per share to 50 cents while that for fiscal 2015 narrowed from $1.32 to 47 cents over the last 7 days.

Other Stocks to Consider

Other retail stocks with a favorable Zacks Rank include ITOCHU Corp. (ITOCY), Kingfisher plc (KGFHY) and Christopher & Banks Corp. (CBK). While ITOCHU Corporation enjoys a Zacks Rank #1 (Strong Buy), Kingfisher and Christopher & Banks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on BKS
Read the Full Research Report on CBK
Read the Full Research Report on ITOCY
Read the Full Research Report on KGFHY

Zacks Investment Research