Pru Sees a Bleak House at B&N.com, Calls It a Sell

Online bookseller losing market share and management is clueless, analyst says, in unusual call.
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Did somebody say sell?

Barnes & Noble.com

(BNBN)

, the online offshoot of the nation's largest bookseller,

warned Tuesday for the second time in three quarters that it would fall significantly short of Wall Street's expectations, prompting a rare sell rating Wednesday from one analyst.

And investors took the advice. The stock fell 28 cents, or 12%, to $2.13 Wednesday.

"In addition to the poor financial performance in the quarter, we are extremely uncomfortable with the lack of visibility provided by management," Mark Rowen, an analyst at

Prudential Securities

, wrote in a tersely worded research note. "Due to the significant miss on financial targets in two of the past three quarters, we question whether management has a grasp on the drivers of its business." Rowen dropped B&N.com to sell from hold, and slashed his price target to $1 from $7. (His firm hasn't done recent underwriting for the company.)

Another analyst, Anthony Noto of

Goldman Sachs

, upped his estimate of how much the company lost in 2000 to $1.05 from 94 cents a share. (Goldman has done underwriting for the company.)

While the holiday season was tough for most retailers, Barnes & Noble.com suffered more than most, due in part to less-than-aggressive promotional activity, analysts say. Its revenue for the quarter is expected to come in at $103 million, compared with the $130 million analysts had projected.

And while in 1998 and 1999 B&N.com gained online market share from the leading e-tailer,

Amazon.com

(AMZN) - Get Report

, the company took a step backward this time. Although books became the top item for online holiday shoppers, according to the research group

Jupiter Media Metrix

, B&N.com dropped off the list of top 10 Internet retailers during the five-week season.

Now, it's swimming upstream in the race for market share.

"In our opinion, the online book market is approaching saturation in online households, and as a result, growth rates for BNBN as well as industry leader Amazon.com have slowed considerably," says Rowen.

Amazon also gave a sneak

preview of its fourth-quarter results Monday, saying it would fall slightly short of the Wall Street estimate for revenue, though it would be in the company's previously announced range.

First on the Barnes & Noble.com's priority list should be finding a top executive. "There is no clear CEO," says Michael Agarwala, analyst at

Ashley Kumar & Co.

, an independent research outlet that doesn't do underwriting. Last January, CEO Jonathan Bulkeley abruptly resigned, and he hasn't been officially replaced. Steve Riggio, 45, vice chairman of both the online unit and its brick-and-mortar parent,

Barnes & Noble

(BKS) - Get Report

, remains acting CEO.

Barnes & Noble.com's woes have prompted some in the industry to speculate that the parent, which owns 40%, will take the company private. For example, such a prediction was on the New Year's list of the editors of the M&A journal the

Daily Deal

. The stock hit a 52 week low of $1.19 on Dec. 28.

Marie Toulantis, B&N.com's chief financial officer, says that's not imminent, but "we look at all kinds of options and scenarios for unlocking shareholder value, and that one is very out there and up front."