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Stock Analyst Update

Barnesandnoble.com Nearly Drowning in Red Ink

Losses heavier than expected, and stock's outlook bleak.

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Online bookseller Barnesandnoble.com (BNBN) reported second-quarter losses Monday that were considerably heavier than analysts' expectations, along with sales that were weaker than expected. Until the firm can rein in its spending and get losses under control, BN.com and its stock face an extremely bleak future.

Although company executives put on a brave face by claiming that their recent investments will pay off in future growth, BN.com has little time to spare in this brutal environment for e-tailers. Sales grew 77% to $67 million, a figure considerably lower than expectations and little more than half the 142% growth the company achieved in the first quarter.

Chief financial officer Marie Toulantis blamed the shortfall partly on the same seasonal slowdown that affected archrival Amazon.com (AMZN), and partly on accounting changes that shaved $4 million off revenue. The second half of the year will tell whether this is truly a seasonal effect, or a more general slowing of online retail growth.

Even more disturbing was BN.com's pro forma loss (excluding noncash items), of $0.27 a share, much worse than the $0.18 loss expected by analysts. Net loss was $0.31 a share, or 67% of sales, considerably worse than last quarter's 56%. Toulantis blamed the increased red ink on a variety of factors, including higher-than-expected marketing and technology costs. She said that these expenses would continue to be high for the rest of the year, but would pay off down the road in higher sales.

BN.com is pouring lots of money into such cutting-edge technology as digital books (through its purchase of MightyWords) and services for wireless Internet users. But any big payoff from these ventures is several years down the road, and BN.com may not have that kind of time. Though it has $284 million in cash as of June 30, it burned through nearly $200 million in the first six months of the year, and getting more funding will be difficult in this environment.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.