Barnes & Noble Looks to

August 28, 2008
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August 28 – September 4, 2008 Edition

Barnes & Noble
Looks to “Larger”
Digital Arena

NEW YORK, NY/8/28/08–Barnes & Noble, Inc. CEO Steve Riggio, reporting via webcast August 21 on its second quarter financial result, made the comment that “We do not believe that eBooks is the total universe of digital products that will be sold in the marketplace. It is a subset of a much larger arena of digital content in many ways. So, we’re looking at the entire arena.” The comment came in the question and answer phase of the webcast and closely followed Borders.

Riggio’s remarks come only a week or so after rival Borders became public and launched a spectacular new web site. Reaction to Borders new site has been extremely favorable, and Barnes & Noble announced it would not be able to finance a long-rumored buyout of Borders.

Meanwhile, in reporting financial results for Barnes & Noble, Riggio said he is “very pleased that our second quarter results exceed both our expectations as well as last year’s performance,” despite a sales and earnings declined of 1.6% to $1.2 billion and a com store sales fell 4.7%.

“. . . one would expect some deleveraging, if not significant deleveraging with a 4.7% comp sales decline,” said Riggio. “Instead, we continue to manage the business extremely well in the trenches, in the midst of what is a very soft retail environment. Of course, this may provide some optimism for the future if sales rebound from recent trends. We’re managing the business well and of course, like all retailers we hope sales rebound.”

“In fact, the closer examination of sales will reveal that even in this soft retail environment across America, the book business is stubbornly holding up. If we normalized our sales without the impact of Harry Potter and its add on sales last year, throw in the double digit decline we’re still experiencing in the music business, the rest of our business was relatively flat so as we’ve said for many years, the book business is a relatively stable business.”

“Our Internet sales were clearly a bright spot in the quarter with a 13.9% growth excluding the effect of Harry Potter. I will note that this is the seventh straight quarter of growth for our Internet business with double digit growth in 2007 and for the first half of 2008. Traffic to the site is up, conversions are up and we continue to enhance the site from usability as well as a content perspective. We’ve also begun to expand our content offerings to include products offered only online enabling us to leverage the eCommerce infrastructure we have built.

In the question and answer phase of the webcast, Riggio was asked by a participant to explain his thinking on the whole marketplace and on the company’s online competitors, he said: “I believe one analyst has put out a forecast on that, probably the first person who has done a survey of the industry to forecast what eBook sales might be based upon some assumptions that he’s made. We began selling digital magazines earlier this year on the website. We’re very encouraged by what we’re seeing there and like with all new strategic developments of any type, we will announce it on the day that we launch but we can’t really make any further comments on anything that we will be doing or might be doing, it’s just so highly strategic.

The participant said: “It sounds as if you’re still working on that at least at the level which you’ve said you pursue these things in the past, at least at that level, is it fair to say that?”

“Yes, of course,” Riggio responded. “There’s the indication that we began selling digital magazines and the fact that we’re very pleased with what we’re seeing there points to a small slice of the arena. We do not believe that eBooks is the total universe of digital products that will be sold in the marketplace. It is a subset of a much larger arena of digital content in many ways. So, we’re looking at the entire arena.”

Barnes & Noble last week reported sales and earnings for the second quarter ended August 2, 2008 have declined by 1.6% to $1.2 billion. The retailer attributed the loss largely to last year’s record sales of J.K. Rowling’s Harry Potter and the Deathly Hallows.

Barnes & Noble store sales decreased 1.6% to $1.1 billion, with comparable store sales decreasing 4.7% for the quarter. Barnes & Noble.com sales were $99.8 million for the quarter, a 3.6% comparable sales increase. Excluding prior year sales of the Harry Potter book, comparable sales decreased 1.5% in stores and increased 13.9% online.

Bestselling titles during the quarter included Stephenie Meyer’s Breaking Dawn, Randy Pausch’s The Last Lecture, Lauren Weisberger’s Chasing Harry Winston and David Wroblewski’s The Story of Edgar Sawtelle.

Second quarter net earnings were $15.4 million or $0.27 per share.

For the third quarter, the company expects comparable store sales at Barnes & Noble stores to decline in the low single digits.

Based on first-half 2008 sales performance and current trends, the company is reducing its full-year comparable store sales guidance from slightly negative to a decrease in the low single digits.

As of August 2, 2008, the company operated 723 Barnes & Noble stores and 73 B. Dalton stores. During the second quarter, 10 Barnes & Noble stores were opened and four were closed. Ten B. Dalton stores were closed during the quarter.

Barnes & Noble, Inc. will report third quarter earnings on or about November 20, 2008.

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