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Barnes & Nobles: Nook Sales Are Great, But They're Killing Us!

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Barnes & Noble issued 2012's most ridiculous press release, bragging about the very business that is dragging it down.

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Now if you needed a lesson in why you shouldn't hit the "Buy" button the minute you see a happy headline, just take a look at this chart of the premarket action in troubled bookseller Barnes & Noble (BKS):


(Click to enlarge)

Some poor souls paid as much as $15.95 this morning for Barnes & Noble -- up 18% from yesterday's close -- only to see the stock collapse as low as $9.28. That's a 42% drop in 25 minutes -- ouch!

And of course, if you were on the other side of that trade, selling or shorting, well done!

So here's what went down.

Barnes & Noble's crack investor relations department kicked off this morning's press release with the following announcements:

  • Barnes & Noble Reports Record NOOK Sales
  • Announces Decision to Explore Separation of Large and Rapidly Growing NOOK Digital Business
  • Retail Business Grows During the Holidays

Not so bad, eh? The Nook's really taking off and retail's hanging in there. And maybe that Nook business gets spun off and does as well as GameStop (GME), which was a top stock during the last bull market.

Hooray!

But we read through the rest of the press release and see...

Updated Guidance -- gotta be great, right?

Wrong!

Here's where the train falls off the rails, and the stock collapses below $10.

Barnes & Noble comes out and says full-year sales are now forecasted to be $7 billion to $7.2 billion, below consensus of $7.33 billion. EBITDA is now expected to come in at $150 milllion to $180 million, down from the $210 million to $250 million range given on December 1.

At the midpoints, that's a 28% drop in the forecast in the span of a month!

Barnes & Noble also now expects a full-year loss of $1.40 to $1.80 per share, which is way worse than Wall Street's $0.75 per share consensus.

So December really had to be an awful month.

Why, you ask? Well, let's see:

The change in guidance is due primarily to a shortfall in the expected sales of NOOK Simple Touch, as well as additional investments in growing the NOOK business, such as advertising to support new products and international expansion in the back half of the year.

So yes, in a press release titled "Barnes & Noble Reports Record NOOK Sales," the company lowers guidance because of a shortfall in a Nook product and associated investments. Obviously, those record sales in the Nook division weren't good enough to improve the company's overall results -- so why brag?

I think these people need a lecture from Judge Judy:


(Click to enlarge)

Now, a spinoff of the Nook division could theoretically be a good idea given Amazon's (AMZN) cut-rate pricing on physical books and attempts to vertically integrate the book business. (See Why Amazon and Apple Will Control the Book Industry.)

But why invest in a spinoff that has to burn money to fight Amazon's Kindle family? Amazon's got money to burn and doesn't care about margins -- it just wants to be big. Like Wal-Mart (WMT) big. (See Why Amazon's Low Margins Deserve Praise.)

And lest we forget, rumors are flying that Apple (AAPL) will hold an iBooks event this month in New York, possibly in conjunction with the announcement of the iPad 3.

Elsewhere in troubled-retail news, Bloomberg floated Best Buy (BBY) as a leverage buyout candidate this morning, and it actually makes a lot of sense for that company to be private. However, that would actually be a boon to Amazon, because in the quest for cash flow, financial buyers would likely underinvest in the stores and turn it into another Sears (SHLD) -- thus sending even more retail market share online.

But again, I do my best to ignore takeover speculation in my analysis, because there isn't a "cheap" stock in the market that hasn't been the target of mergers and acquisitions rumors.

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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