Barnes & Noble Inc. (NYSE: BKS) shares fell sharply after the company warned that recessionary pressures will make 2008 a difficult year for the bookseller, as it now expects earnings to be well below analyst expectations. The bookseller also noted that the business environment remains very competitive despite record-setting sales of Harry Potter and improved sales of The Secret in late 2007 and 2008. Currently, Barnes & Noble trades below enterprise value at just over 12x earnings and many investors - including well-known activists - insist that it is cheap these days. So, is this bookseller a turnaround play or flop?

Famed activist Bill Ackman has been one of Barnes & Nobles most faithful supporters and still holds over $125 million worth of stock in the troubled company, according to his latest Schedule 13F filing. Many investors are predicting that he will eventually push the company to utilize its spare cash to pursue share buybacks in order to boost its earnings per share and encourage a higher share price to maintain its current multiples. However, he may run into problems if the company cannot sustain its growth as this is a key factor to encouraging and increasing multiples. Considering he is already sitting on a large loss, many are hoping he will take action to also turn around the business itself rather than focusing purely on unlocking value.

Some insiders have also shown faith in Barnes & Noble by purchasing large amounts of shares on the open market, according to recent Form 4 filings with the SEC. Chairman of the Board, Leonard Riggio, purchased 300,000 shares earlier this month at prices ranging from $32.29 to $33.86 in cash on the open market. These actions by such high ranking members suggest confidence in the company's management to turn the situation around and improve growth prospects, which would increase the company's trading multiple, especially if Ackman took action. Meanwhile, the company has already instituted a dividend and share buyback program aimed at encouraging investors to properly value the company.

Just what actions is the Barnes & Noble taking to orchestrate a turnaround? In its most recent 8-K, the bookseller said it was focusing its efforts on managing its expenses and working capital with a realistic view of market conditions, as well as continuing to refine its marketing strategies and grow the member program to maximize top line growth profitability. Unfortunately, these actions will take awhile to come to fruition as it now expects full-year earnings to come in between $1.70 and $1.90 per share for 2008 - flat with 2007 on an operating basis. However, the company believes that its strong balance sheet and free cash flow will give it flexibility to compete effectively in 2008 as well as continue to unlock value.

In the end, Barnes & Noble is a company with a strong balance sheet and a dedication to unlocking value. However, it has been struggling recently with its growth prospects, which has led to a lower valuation and share price. It will be interesting to see whether management can take action to turn this company around. Clearly, both major insiders as well as activists are confident which should lead many amateur investors to the same conclusion. Combined, these factors make BKS a stock worth watching closely over the next year or two!

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