By Phil Wahba
(Reuters) - Barnes & Noble Inc's expensive investments to keep its Nook e-reader competitive with Amazon's Kindle led to an unexpected quarterly loss for the bookseller, sending its shares down as much as 24 percent on Thursday.
The No. 1 U.S. bookstore chain, which has bet its future on the Nook as book sales shrivel, said sales from the Nook group of devices, including content like e-books, rose 85 percent to $220 million in its fiscal second quarter ended October 29.
But updating the device and promoting it through an aggressive national television and newspaper advertising campaign weighed on results and will continue to do so, the company said.
"Barnes & Noble really has to invest more than it previously expected to keep up with Kindle," Morningstar analyst Peter Wahlstrom said.
Barnes & Noble, which launched a tablet version of Nook last month, said it "plans to invest more heavily" on promoting the device to win new customers.
The retailer now expects full-year earnings before interest, taxes, depreciation and amortization to come in at the lower end of its previous forecast of $210 million to $250 million.
The company's shares were down $3.06, or 17.5 percent, at $14.38 in midday trading after falling as low as $13.28 earlier in the day.
S&P Capital IQ analyst Michael Souers lowered his recommendation the shares to "sell" from "hold."
Between the launch of the Nook Tablet on November 7 and the close of markets on Wednesday, the shares rose 50 percent on the belief that Barnes & Noble was keeping pace with Amazon.com Inc in the e-reader and lower-cost tablet wars.
The Nook Tablet has been well reviewed and well received. That device and other versions of the Nook helped lift sales at Barnes & Noble superstores open at least 15 months by 10.9 percent over the U.S. Thanksgiving weekend, the busiest of the year for shopping.
TOUGH FIGHT AGAINST AMAZON
Barnes & Noble, which launched the first version of the Nook just two years ago, is second only to Amazon in the e-books market. It claims to have 27 percent of the market.
But for all its quick success, Barnes & Noble is up against a formidable, deep-pocketed rival whose strategy often entails undercutting competitors on price. In September, when Amazon launched its Kindle Fire tablet, it also slashed prices on other Kindles.
At the same time it introduced the Nook Tablet last month, Barnes & Noble cut prices on other Nook devices. Interim Chief Financial Officer Allen Lindstrom acknowledged on a call with Wall Street analysts Thursday that the price cuts ate into margins in the second quarter.
And the Kindle Fire appears to be a hit. Amazon said this week that overall Kindle sales quadrupled on Black Friday compared with the same day last year.
Even as the Nook Tablet sold well at Barnes & Noble stores, analysts were concerned that other retailers that carry the product were giving it less prominence than the Kindle. Nook is also sold at chains like Sears and Best Buy.
"Incremental distribution for the Nook is likely having less impact than we anticipated," Goldman Sachs wrote in a note on Monday.
During the second quarter, same-store sales at Barnes & Noble's namesake stores slid 0.6 percent. Sales of paper books continued to fall, but the company got some relief from the final liquidation of rival Borders Inc, which occurred half way into the quarter.
Barnes & Noble said in August that sales could get a net bump for the year of $150 million to $200 million from the Borders bankruptcy. It did not update that estimate on Thursday, but Lindstrom said sales were "trending" in that direction.
Same-store sales at its College bookstore chain rose 0.4 percent in the second quarter. Overall sales fell 0.6 percent to $1.89 billion.
Barnes & Noble reported a net loss of $6.6 million, or 17 cents per share, for the quarter, compared with a loss of $12.6 million, or 22 cents per share, a year earlier.
Analysts were expecting a profit of 3 cents per share, according to Thomson Reuters I/B/E/S.
After offering in May to buy Barnes & Noble for $1 billion, or $17 on share, billionaire John Malone's Liberty Interactive Corp decided instead in August to invest $204 million and purchase preferred stock at a strike price of $17 that could give it a 16.6 percent stake in the company.
(Reporting by Phil Wahba; editing by Maureen Bavdek and John Wallace)