Booksellers Need to Find a New Story

When investing, it often makes sense to be a contrarian and go against the crowd. But sometimes the crowd is right.

Such is the case with the big book chains Borders Group (BGP Quote) and Barnes & Noble(BKS Quote), which each reported weaker-than-expected fourth-quarter results Thursday.

Just three of nine analysts rate Barnes & Noble a buy, while only one analyst likes Borders of the 10 who cover the company. Given the tough retail environment and few signs of improvement ahead, Wall Street's current cautious stance on the retailers is prudent.

Borders Looks to Turn the Page

Borders earned $1.61 a share in the fourth quarter, with $1.5 billion in revenue. The results missed analysts' estimates by 2 cents on the bottom line, though they were a tad above Wall Street's forecast on the top line. Same-store sales slid 2.2% at Borders Superstores for the fiscal year.

Borders' operating results, however, were overshadowed by the company's announcement of a plan to improve its performance.

The retail environment for books is extremely difficult. Book stores can only compete on price and customer experience. However, with the price competition from Amazon.com (AMZN Quote) and eBay (EBAY Quote), not to mention discounted tomes at Wal-Mart (WMT Quote), Target (TGT Quote) and Costco (COST Quote), books have become commoditized. Shoppers often look for the lowest price, rather than pledge loyalty to their favorite retailer.