Barnes & Noble Strategy Shift Trips Stock - TheStreet



) -- Shares of

Barnes & Noble

(BKS) - Get Report

slumped on heavy volume Tuesday after the bookseller posted a widening fourth-quarter loss and forecast more red ink in fiscal 2011 as it boosts spending on its digital strategy.

The stock was off 12% to $14.44 in midday action. Volume of 1.65 million was already more than double the issue's trailing three-month daily average of around 750,000. The session-worst level of $13.58 was a fresh 52-week low, and at that price, the shares were down roughly 24% since the start of 2010.

After Monday's closing bell, Barnes & Noble reported a net loss of $32 million, or 58 cents a share, for its fiscal fourth quarter, which ended May 2. Excluding one-time tax benefits, the loss was 89 cents a share, much wider than a comparable year-ago loss of a nickel per share. For fiscal 2010, the company's loss before items was 39 cents a share, roughly in-line with the average estimate of analysts polled by

Thomson Reuters


Total sales rose 19% for the fourth quarter to $1.3 billion but in-store sales actually fell 3% to $962 million amid a 3.1% decline in same-store sales. The growth was spurred by strength in the company's online operations, as sales soared 51% on a year-over-year to $141 million for the quarter. For the full year, the company reported total sales of $5.8 billion, an increase of 24% from the previous year, although in-store sales declined 4.8%.

Barnes & Noble said it had increased market share in all three of its distribution channels, including book stores, digital books and sales through its website. But despite projecting a fiscal 2011 sales increase ranging from 20% to 25%, the company said it expects fiscal 2011 results to range from break-even to a loss of 40 cents a share because of its plan to make significant investments in its digital strategy.

"In light of the exciting digital opportunity before us, we are planning to redirect a significant portion of our financial resources towards investments in technology, sales and marketing," said William Lynch, the company's CEO. "These investments will impact our bottom line in 2011, but we believe they will enable Barnes & Noble to capitalize on the significant mid-to-long-term growth opportunities presented by the digital markets."

Investors obviously have doubts about the company's expensive attempts to compete in the electronic space with its Nook book reader following the runaway success of's

(AMZN) - Get Report

Kindle and


(AAPL) - Get Report

iPad and have punished the shares. Goldman Sachs analyst Matthew Fassler has sounded an alarm on the stock, reiterating a "sell" rating and saying the company's projections "reinforced our concern that the costs of competing in the online arena threaten to outweigh the benefits in any visible timeframe."



coverage last week of heightened interest in

put options

on Barnes and Noble's shares, the bid on $12.50 put option contracts expiring on October 10 that sold for 60 cents an option last Thursday, had nearly doubled to $1.05 Tuesday morning.

Also on Tuesday, 642 contracts to sell shares for $17.50 expiring January 11 had changed hands, at prices ranging between $4.90 and $5.45.

An investor purchasing one January 11 deep-in-the-money call option for $17.50 for a price of $4.90, would need the shares to fall to $12.60 by January 11 in order to break even, aside from commission charges. Since one option contract controls 100 shares, the total investment would be $490. If shares were to drop to $10.00, the investor would net $2.60 a share for a total of $260, or 53% on the investment.


Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.