UPDATE 3-Barnes & Noble expectations on hold, shares fall

* Q2 EPS 14 cents vs Wall St view 10 cents

* Q2 sales fall 5.3 pct to $1.16 bln

* Will update full-year guidance after College deal closes

* Still sees full-year same-store sales down 3-5 pct

* Shares down 4 percent (Recasts; Adds comments, byline, updates stock activity)

By Jessica Wohl

CHICAGO, Aug 20 (Reuters) - Barnes & Noble Inc's (BKS.N) quarterly profit did not fall as much as expected, but its shares skidded as sales kept sliding and the retailer put off updating its annual forecast as it prepares to buy a company.

The largest U.S. bricks-and-mortar bookseller, which raised its full-year earnings view in May, said on Thursday it would give an updated forecast on or around Oct. 1, once it closes its acquisition of Barnes & Noble College Booksellers.

Traditional booksellers like Barnes & Noble and Borders Group Inc BGP.N are facing increased pressure from online retailers, especially from Web giant Amazon.com Inc (AMZN.O). At the same time, consumers have cut back on discretionary purchases, including books.

While he raised his earnings forecast after the better-than-expected second-quarter profit, Standard & Poor's Equity Research Retail Analyst Michael Souers kept his $16 price target and "strong sell" recommendation on the shares.

"Facing long-term challenges such as a secular decline in adult readership levels as well as an increasing shift toward eBooks, we think shares are overvalued," he said in a note.

Barnes & Noble's shares fell 84 cents, or 4 percent, to $20.11, after rising in early trading. Shares of Borders, which is set to report second-quarter results next week, rose 18 cents, or 5.29 percent, to $3.58.

NEW MOMENTUM

With more books sold online, and with new technology such as electronic book readers slowly gaining momentum, booksellers are scrambling to gain entry in the burgeoning digital market.

In July, Barnes & Noble unveiled an online store for digital books. The company expects to offer well over 1 million titles digitally by the end of the year, Chief Executive Steve Riggio said during a conference call.

Last week, Barnes & Noble announced plans to buy Barnes & Noble College Booksellers for $596 million, a move that would expand its store base and provide entry into the digital textbook arena. [ID:nN10510356]

The company stressed that the majority of U.S. colleges and universities still run their own book stores, which suggests a big opportunity for new business as institutions may look to offload that responsibility.

Less than halfway into the year, the college business has already signed contracts for $56 million in annualized new business, Barnes & Noble Chief Financial Officer Joseph Lombardi said during the call. Over the past five years, the average annual gross new business was $64 million, he said.

He also said that annual adjusted EBITDA growth at the college business will likely be around the 4 percent to 5 percent range seen in the last two years, which is lower than it was in some previous periods.

PROFIT, SALES DECLINE

Barnes & Noble earned $12.3 million, or 21 cents per share, in its second quarter that ended Aug. 1, down from $15.4 million, or 27 cents per share, a year earlier.

Excluding a benefit from an insurance settlement, it earned 14 cents per share, topping analysts' average forecast of 10 cents a share, according to Reuters Estimates. The company had forecast earnings of 5 cents to 15 cents per share.

Profit was aided by lower distribution costs, fewer markdowns and better sales of higher-margin bargain and gift items.

Sales fell 5.3 percent to $1.16 billion, in line with analysts' expectations. Same-store sales, or sales at stores open at least a year, fell 6.9 percent, near the high end of the company's projection for a 5 percent to 7 percent decline. Such sales fell 5.7 percent in the first quarter.

While fewer shoppers visited the company's stores and spent slightly less on their purchases, its Web site sales rose 2 percent after falling 7 percent in the first quarter.

Barnes & Noble, which operates nearly 800 stores, said it still expects same-store sales to decline 3 percent to 5 percent this year. It also forecast a same-store sales decline of 1 percent to 3 percent for the current third quarter.

The company previously forecast full-year earnings of $1.10 to $1.40 per share. (Reporting by Jessica Wohl, additional reporting by Alexandria Sage in San Francisco, editing by Maureen Bavdek and Gunna Dickson)