Q2 2004 Barnes&Noble Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day everyone and welcome to the Barnes&Noble second quarter 2004 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to the Chief Financial Officer, Mr. Joseph Lombardi. Please go ahead, sir.

JOSEPH LOMBARDI, CHIEF FINANCIAL OFFICER, BARNES & NOBLE INCORPORATED: Good morning and welcome to Barnes&Noble second quarter conference call. Joining us today are Steve Riggio, Chief Executive Officer, Mitchell Klipper, Chief Operating Officer, Marie Talantis, Chief Executive Officer of Barnes&Noble.com, and other members of the senior management team. Before I begin I would like to remind you that this call is covered by the Safe Harbor disclosure contain in our public documents and is the property of Barnes&Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes&Noble.

This morning before the market opened we released our results for the second quarter ended July 31. There was a great deal of information in our prepared comments this morning. In addition to over achieving guidance we have closed two major transactions this quarter which have implications to earnings and future guidance, and require explanation. Sales of Barnes&Noble book sellers were $961 million for the quarter a 5% increase over last year. Barnes&Noble comparable store sales increased 1.4% against last year's strong 5.6% increase. The children's book business was obviously impacted negatively by the Harry Potter comparison from last year but the continued strength in best sellers particularly nonfiction helped drive our better than expected sales results.

GAAP earnings for the second quarter include a one time charge relating to the redemption of the convertible notes which closed on June 28. Of the $300 million of notes originally issued 18 million converted into approximately 546,000 shares of common stock, the remaining $282 million was redeemed for cash. The cash redemption was priced at 103% of par, resulting in approximately $8.5 of redemption premium expense. In addition, the unamortized portion of deferred financing fees from the original issuance of these notes was written off as a non-cash charge of 6.1 million. Included in this quarters GAAP earnings, therefore, is a charge of 14.6 million or 12 cents per share related to this transaction. As we have previously announced this transaction is not material to full year earnings per share as the negative impact of these write-offs is offset by a reduction of the fully diluted weighted-average share count. For the second quarter, however, the redemption is 12 cents dilutive to GAAP earnings per share since the whole charge hit the second quarter but the share count improvement is only a fourth quarter and full year event.

When we announced that we were calling notes we indicated that the notes would be funded through our revolving credit facility. As of the end of the second quarter our balance sheet reflects debt of 257 million on the revolver. Subsequent to quarters ends on August 10 we entered into a term loan agreement with a syndicate of banks for 245 million for five years at LIBOR plus one and three eighths. This facility provides the company with appropriate debt capacity and favorable interest rates.

Book store earnings per share for the quarter excluding this charge was 28 cents as compared to our guidance of 17 to 19 cents per share. The retail book stores exceeded the higher ends of guidance by 9 cents, primarily due to achieving a 1.4% comparable store sales increase as compared to our negative two to three guidance.

On May 29, 2004, we completed our merger with Barnes&Noble.com. Barnes&Noble.com sales decreased 6% for the second quarter resulting in net sales of 85 million which is in line with guidance. Net losses at Barnes&Noble.com were 7.6 million or 11 cents per share compared to our guidance of nine to 11 cents per share. Barnes&Noble.coms results were negatively impacted by about 1 penny per share due to amortization expenses associated with purchase accounting adjustments finalized this quarter. I will elaborate on these adjustments when discussing guidance shortly. As a reminder Barnes&Noble.com is consolidated into our financial statements this year and was accounted for under the equity method of accounting at this time last year. Consistent with last quarter we have provided both GAAP and pro forma data in our press release. Pro forma information assumes 100% ownership of Barnes&Noble.com for all periods presented.

Please also note that year to date Barnes&Noble.com results reflect the six-month period ending July 31. These results include the to report .com reports on Barnes&Noble's fiscal calander. In effect this a one time adjustment to add July and remove January results from current year operation. The net impact on sales and earning for the second quarter and full year is negligible. Our merger transaction of Barnes&Noble.com as well as the Bertelsmann transaction last September has provided us with a significant future cash tax benefits. More than $100 million of the combined $320 million …