How a Management Pissing Match Hurt Barnes & Noble's Earnings

(MoneyWatch) 

Nothing turns the glare of the klieg lights away from a struggle for corporate top dog like less-than-stellar financials. But what yesterday's Barnes & Noble (BKS) earnings report did illuminate is the potential toll the pissing match, err, proxy battle between billionaire investor Ron Burkle and Barnes & Noble's chairman and majority stakeholder Len Riggio is going to have on the world's largest bookseller.

For its fiscal 2011 first quarter, the retailer posted a consolidated net loss of $63 million, or $1.12 per share. Included in these results are pre-tax legal expenses of $9.5 million, or $0.11 per share. Ouch. On the plus side, B&N's total sales for the first quarter increased 21 percent to $1.4 billion, and Barnes & Noble.com reflected a 42 percent jump. Online comps rose 53 percent. Back on the minus side, store sales were down 2 percent overall.

Burkle initially accused Riggio of managing the chain to serve his own purposes and mounted the proxy fight after a Delaware court ruled in favor of B&N's poison pill measure to prevent a hostile takeover. Burkle wants to place three directors of his own choosing to B&N's board to balance the power.

This is where that $9.5 million gets significant. It's only the beginning of what appears will be much greater loss for B&N. The company reported that future legal costs, including costs in connection with a proxy contest, will lower its full year guidance by $0.25 per share and now expects full year net loss per share to be in the range of $0.25 to $0.65.

Though investors the world over have been hard hit by the recession, no one wants to pay for what amounts to a legal battle of wills between Riggio and Burkle. Talks had progressed to the point where it appeared a settlement could be reached out of court, but all bets were off when B&N put itself up for sale.

With potential millions up in smoke to pay attorneys on top of over $50 million lost for the quarter, the chain's not looking like much of a buy ?€" to outsiders, anyway. But that's probably good news to Riggio who is contemplating creating an investor group to take the company private -- another point of contention for Burkle. If Riggio and company succeed in this bid, their problems will be far from over. They'll still have to invest in management strategies to turn the bricks of over 1,000 outlets into clicks.

On the other hand, the earnings loss could also trigger a favorable outcome for Burkle. Such dismal numbers would indicate that his original argument was right and B&N is being mismanaged. However, it's hard to ignore that exponential increase in online sales. Digital marketing is something B&N's put a lot of financial muscle behind in the past year. That's proof it's paying off already.

Image via Flickr user *Sage* TokyoChicago CC 2.0

Related:

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