No Potter Magic

In the bookstore business, the Harry Potter phenomenon is about as close as it comes to a sure thing. It doesn't require advanced study in divination (one of Harry's least favorite courses) or the aid of a crystal ball to know that momentum builds with each new installment, driving store traffic and boosting top-line growth. With the most highly anticipated chapter of the saga yet arriving on (and disappearing from) bookshelves last month, the question for leading bookseller Barnes & Noble (NYSE: BKS - News) isn't whether it had an impact, but just how much.



Judging by the down arrow next to the company's stock symbol today, the answer would have to be "not enough". As expected, the final worldwide sales tally for Harry Potter and the Half-Blood Prince was a record-shattering 8.9 million copies -- in the first 24 hours alone -- and a big chunk of that total was run through checkout lines at Barnes & Noble. However, second-quarter revenues still came up inches short, rising just 6% to $1.17 billion, vs. expectations of $1.18 billion. Once again, most of the major retailers ran the book at a steep discount: Wal-Mart (NYSE: WMT - News) was willing to part with a copy for just $15.78, almost half off the $29.99 cover price.

Same-store sales, or comps, at the Barnes & Noble's namesake stores were up 4.3% for the quarter, while online revenues jumped 14% to $96.3 million. Meanwhile, rival Borders Group (NYSE: BGP - News) reported just a 1.8% gain at its superstores, as well as a weaker-than-expected 17% increase in international sales. (Internal targets had projected a gain of as much as 30%.) However, efforts to renovate Borders' flagging Waldenbooks stores appear to be taking hold.

Though it cut deeply into last quarter's bottom line, the transformation of 44 of the mall-based units into new Borders Express outlets helped the chain post a respectable 1.9% comps improvement, while Barnes & Noble's increasingly irrelevant B. Dalton stores eked out a slim 0.2% gain. Perhaps the biggest winner, though, was Books-A-Million (Nasdaq: BAMM - News). The company, which was recently added to the Motley Fool Hidden Gems Tiny Gems Watch List, leveraged the Harry Potter release into a solid 4.4% increase in same-store sales.

Though Harry's exploits have readers spellbound for the time being, Barnes & Noble will need to conjure up some magic of its own going forward. To be fair, net income was up a healthy 55% last quarter to $13.5 million, or $0.18 per share, and not all of that increase can be traced back to
J.K. Rowling's series. For example, more than two-thirds of the spike in online sales at the bookseller's bn.com was completely unrelated to Hogwarts.

More importantly, the company has also announced its first quarterly dividend payment, which at $0.15 works out to a reasonable 1.6% yield at current prices. Without a crystal ball, I would take that as a pretty good indication that the cash flow picture is on the right track.