Updated from 9:44 a.m. EST

Barnes & Noble

(BKS) - Get Report

read a cautionary tale to investors Thursday, saying itsprofits rose in the fourth quarter, but warning that its first quarterearnings may come up short.

In its quarter ended Feb. 1, the books and video game retailer earned$111 million, or $1.49 a share. That was up from the year ago period, whenBarnes & Noble earned $84 million, or $1.09 a share.

Wall Street analysts were projecting that the retail chain would earn$1.47 a share, according to Thomson Financial/First Call.

In the first quarter, Barnes & Noble expects its bottom line to rangefrom break-even to a loss of 3 cents a share. For all of fiscal 2003, thecompany expects to earn between $1.93 to $2.01 a share.

The guidance could force analysts to reduce their earnings outlook forthe first quarter. Analysts had projected that Barnes & Noble would breakeven in the first quarter and earn $1.94 for the full year.

The fourth-quarter, bottom-line increase came despite slow revenuegrowth. Barnes & Noble's revenue increased just 1.7% in the quarter to$1.85 billion.

Falling same-store sales helped to keep the company's revenue growth incheck. Same-store sales, which compare results at like outlets open morethan one year, fell 3% in the quarter at the company's eponymous bookstores.For the year, sales at the Barnes & Noble stores were flat.

The company's mall-based B. Dalton bookstores and its GameStopsubsidiary fared worse in the quarter. Same-store sales at GameStop fell7.4% in the quarter and plunged 11.4% at B. Dalton. For the year,comparable-store sales increased 11.4% at GameStop, while falling 6.4% at B.Dalton.

Overall revenue at B. Dalton plummeted 20.7% in the quarter to $88.9million. For the year, revenue dropped 16.2% to $260 million, as the companyclosed 47 stores.

Barnes & Noble's problems with B. Dalton mirror those that rival BordersGroup has faced with Waldenbooks. Borders

reported lastweek that declining sales and store closures at its Waldenbooks unit kept alid on both its revenue and earning in its fourth quarter.

Despite the revenue problems, Barnes & Noble did benefit from improvingtop-line margins. In the quarter, Barnes & Noble's cost of goods sold andoccupancy costs declined 59 basis points to 71.08% of sales.

The bookstore chain was also helped by better results at itsBarnes&Noble.com subsidiary. The

Amazon.com

(AMZN) - Get Report

rival lost $15 million in thefourth quarter, versus $127.8 million in the year ago period. Barnes & Noble's share of that loss was $3.3 million, or 4 cents a share, in the justcompleted quarter, compared with $27.1 million, or 34 cents a share, in yearago quarter.

While the dot-com unit's improved results helped Barnes & Noble'sbottom line, the company saw no benefit from an improvement at GameStop, itsvideo game subsidiary.

In the quarter, GameStop earned $31.6 million on $520.4 million insales. In the year ago quarter, the video game retailer earned $18.7 millionon $514 million in sales.

Since it owned GameStop outright last year, Barnes & Noble was able torecord all of the $18.7 million as its own profit. But the company has sincespun off GameStop, and its portion of the video game chain's profits in thejust completed quarter was $17.7 million, or 23 cents a share.

For the first quarter of fiscal 2003, Barnes & Noble expects same-storesales at its self-named bookstores to decline between 3.5% to 5%. For theyear, it expects the chain's same-store sales to range from flat to up 1%.

In contrast, the company expects B. Dalton's comparable-store sales tofall 6% to 7% in the current year.

Meanwhile GameStop should increase its same-store sales between 5% to 7%in the quarter and between 4% to 6% for the year, Barnes & Noble said.