updated 5/17/2005 6:35:33 PM ET 2005-05-17T22:35:33

Borders Group Inc. said Tuesday it swung to a loss in its first quarter due in part to a drop in sales at stores open at least a year, while rival Barnes & Noble Inc. reported a narrower profit because of its GameStop division spinoff.

But the nation's two largest booksellers were looking forward to stronger second-quarter results with the expected arrival of the sixth "Harry Potter" book in July.

Industry leader Barnes & Noble said it earned $9.9 million, or 13 cents per share, in the three months ended April 30, down from $11.4 million, or 16 cents per share, a year earlier.

The New York-based company had predicted earnings ranging from 11 cents to 13 cents per share, and analysts surveyed by Thomson Financial were looking for profit at the low end of that guidance — 11 cents per share on sales of $1.1 billion.

Barnes & Noble said earnings from continuing operations — which exclude year-ago income from its now spun-off GameStop business — rose substantially. Excluding that item, earnings would have grown 37 percent.

The bookseller said its total sales grew 4 percent to $1.1 billion from $1.06 billion, with same-store sales rising 2.2 percent.

After the markets closed Tuesday, Ann Arbor-based Borders posted a loss of $5.3 million, or 7 cents a share, for its fiscal first quarter, which ended April 23. That was in contrast to a profit of $2.3 million, or 3 cents a share, last year. The latest quarter includes a charge of 2 cents per share for asset write-offs and accelerated depreciation related to remodeling stores.

Borders revised its guidance last month with just a few days left in the quarter, saying it expected a loss of 6 cents to 7 cents per share, compared to a previous forecast of break-even to a gain of 2 cents per share. Analysts polled by Thomson Financial had predicted a loss of 6 cents.

Sales rose 2 percent to $847.2 million from $830.8 million last year. Total revenue climbed to $853 million from $838.1 million.

Chief executive Greg Josefowicz said despite sales of trade books that met expectations, "there was not enough vitality in that category to compensate for declines in others, primarily music... ."

The company said same-store sales fell 0.7 percent at Borders and 3.1 percent at Waldenbooks, driven by weakness in its music segment. Same-store sales are sales at stores open at least a year and are considered a good measure of a retailer's health.

Music, which accounts for a much larger percentage of Borders' sales than it does for Barnes & Noble, is considered a vulnerable area for the smaller company.

Analyst Derek Leckow of Barrington Research said steps Borders is taking to reduce the square footage it devotes to music, as well as improvements it is making to the layout of its superstores, would help the company turn around its same-store sales decline.

Leckow also praised Borders' conversions of its smaller Waldenbooks stores to a Borders Express format.

"That's also going to help because they can leverage some of their spending on national brand advertising," he said.

Borders began the conversions last year with 37 stores and plans to convert 75 to 100 more of its 705 Waldenbooks during 2005.

Borders said it expects earnings in the second quarter to range from 2 cents to 6 cents a share, including charges totaling 2 cents. The current Wall Street forecast is for earnings of 9 cents per share.

For the full year, the company forecasts earnings will range from $1.70 to $1.84 a share. That compares with 2004 earnings of $1.69 a share.

Barnes & Noble predicted the arrival of the sixth "Harry Potter" book in the popular series by author J.K. Rowling, "Harry Potter and the Half-Blood Prince," in mid-July will boost second-quarter sales, and it forecast earnings of 19 cents to 21 cents per share. That assumes same-store sales growth in the mid-single digit percentages.

Analysts currently expect second-quarter earnings of 16 cents per share.

Barnes & Noble backed its year-end outlook for earnings of $1.94 to $1.98 per share with same-store sales growing by about 3 percent. Analysts are looking for profit of $1.93 per share.

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