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Barnes & Noble Inc. $43 – New York symbol BKS

BARNES & NOBLE INC. $43 (New York symbol BKS; WSSF Rating: Average) is the world’s largest bookseller, with 824 bookstores in 50 states. It also sells books and other products over the Internet.

In November 2004, the company handed out its 63% stake in video game retailer GameStop Corp. to its own stockholders as a special dividend. The spin-off hurt Barnes & Noble’s short-term prospects. But it also let it focus on improving profitability at its less-risky book selling business.

In the nine weeks ended December 31, 2005, sales at its Barnes & Noble superstores rose 5.2% to $1.1 billion from a year earlier. Same-store sales grew 2.3%. However, sales at its B. Dalton mall-based stores fell 18.4% to $41.3 million as the company continued to close unprofitable outlets. On a same-store basis, sales at this division grew 3.0%. Sales at the online operation rose 1.0%, to $106.1 million.

Greater efficiency and fewer inventory buildups at its stores should lift Barnes & Noble’s profits in the fiscal year ended January 31, 2006 to $2.02 a share, up 12.8% from $1.79 a year earlier. The stock now trades at 21.3 times that estimate.

The higher earnings have also let Barnes & Noble expand its stock buyback program. In the first nine months of fiscal 2006, it bought back roughly 10% of its shares. It also started paying a quarterly dividend of $0.15 a share. The annual rate of $0.60 yields 1.4%.

However, the company faces increasing competition from other online booksellers and large discount retailers such as Wal-Mart and Costco.

Barnes & Noble is a hold.

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