Borders Group (BGP)

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See all Bulls Reasons Bulls: Reasons To Buy Large list of famous value investors and turnaround specialists getting on board 100% agree Large list of famous value investors and turnaround specialists getting on board Pershing owns 10.6 million or 18% of outstanding shares, and David Dreman’s Value Management owns 4.8 million or 8% of outstanding shares. Citadel Investment Group also owns 3.2 million or 5.4% of outstanding shares (WSJ BGP Institutional Holdings)(subscription only). As... read more View or Edit Reason 3 votes 100% agree 10-K Notes 100% agree 10-K Notes Some information from the just-released Borders (BGP) 10-K. Achieved average sales per square foot of $228 and average sales per superstore of $5.6 million. International superstores, which operate under the Borders name, achieved average sales per square foot of $381... read more View or Edit Reason 2 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Large amounts of debt and still no profits 100% agree Large amounts of debt and still no profits Fundamentally, the company isn’t making any money and it has a lot of debt: about $500 million net. View or Edit Reason 1 votes 100% agree "Fewer people read books, and when they do they go to Amazon" 0% agree "Fewer people read books, and when they do they go to Amazon" The company is struggling due to competition from online booksellers like Amazon.com (AMZN) and Barnes & Noble (BKS), a hefty debt load, a general cultural trend away from reading books, as well as the tough macroeconomic environment. View or Edit Reason 0 votes 0% agree Fewer people read books, and when they do they go to Amazon 0% agree Fewer people read books, and when they do they go to Amazon The company is struggling due to competition from online booksellers like Amazon.com (AMZN) and Barnes & Noble (BKS), a hefty debt load, a general cultural trend away from reading books, as well as the tough macroeconomic environment. View or Edit Reason 1 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Borders Group Inc. (NYSE:BGP) is the second largest U.S. based book retailer and the largest mall-based bookseller in the country. As of February 2007 it operated 567 book and music superstores under the Borders name, 564 mall-based bookstores primarily under the Waldenbooks and Borders Express names, and 30 stores in the U.K. In the face of significant market pressures, the company looks to close about half of its mall-based stores and all but a few of its international outlets in 2008 and 2009 to concentrate on its core U.S. superstore business.

In recent years, the company has been in the crossroads of several potent negative trends:

• Younger generations of Americans are increasingly adopting digital media such as MP3s, online video, and video games, which have both direct impacts on the sales of traditional media such as CDs and DVDs, and indirect effects as well (more distractions means less time for reading books).
• Compounding this digital effect is the onslaught from e-commerce companies such as Amazon.com (AMZN), which have the ability to significantly undercut brick and mortar retailers' prices on books, CDs, DVDs and other offerings. Borders will be launching its own e-commerce offering in 2008, many years behind its key competitors.
• Finally, Borders is the largest mall-based book retailer in the U.S. at a time when mall-based retail is slowing down in the face of one-stop-shopping at stores such as Wal-Mart Stores (WMT) and Target (TGT)

[edit] Business Financials

Borders makes money through the sale of books and CDs as well as its in-store Seattle's Best Coffee brand cafes and Paperchase gift and stationery shops. As seen in the pie chart, two-thirds of its sales came from its flagship Borders retail outlets, with the remaining one-third split evenly between its specialty Waldenbooks retail stores and international sales, both of which took operating losses in FY 2006.

[edit] Borders 2008 showing

Borders posted a loss of 53 cents per share vs a 63 cent loss last year. Same-store sales at Borders U.S. superstores, or sales at stores open at least a year, fell 4.1 percent. Total consolidated sales, at $784.7 million, were down 1.0% over a year ago. At Borders domestic superstores, comparable store sales for the period decreased by 4.1%. Without the impact of music, same-store sales at Borders domestic superstores decreased by 1.7% for the quarter. The music decline was expected as Borders has made the decision to dramatically scale back operations there.

The debt was reduced to $591.9 million at the end of the first quarter from $722.8 million at the end of the year-earlier quarter and cash flow improved by $133 million.

[edit] Borders 2007 showing

Some information from the just-released Borders (BGP) 10-K.

• Achieved average sales per square foot of $228 and average sales per superstore of $5.6 million.
• International superstores, which operate under the Borders name, achieved average sales per square foot of $381 and average sales per superstore of $8.3 million in 2007.
• Waldenbooks Specialty Retail operates stores under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. Average sales per square foot were $277 and average sales per store were $1.1 million for 2007
• Borders leases all of its stores. Borders store leases generally have an average initial term of 15 to 20 years with multiple three- to five-year renewal options. At February 2, 2008, the average unexpired term under Borders existing store leases in the United States was 9.8 years prior to the exercise of any options. The expiration of Borders leases for stores open at February 2, 2008 are as follows:
• Waldenbooks Specialty Retail store leases generally have an initial term of five to 10 years, and in certain cases posses renewal terms of one to three years. At present, the average unexpired term under Waldenbooks Specialty Retail existing store leases is approximately 1.7 years.
• Borders has $92.2 million remaining on a share repurchase authorization but cannot repurchase them if borrowings under credit agreement exceed 90%.
• Borders Rewards has grown to over 25 million members.

Again, nothing earth shattering which is a nice disclosure sign.^[1]

[edit] Flagging 2006 Strategies

Over the past few years Borders strategy has been to invest in domestic expansion and superstore remodeling, moving floor space away from the weaker music segment, though this strategy failed to boost store traffic and transactions sufficiently to meet projected sales targets in 2006^[2].

The international segment lost money in 2006, and as a result, in 2007, the company Borders is paring down their international and Waldenbooks segments and reducing investments in domestic expansion and remodeling to focus on their core superstore business^[3]. The company reported negative income in FY 2006 because Borders took a charge to write down the value of some of their U.K. investments and specialty retail stores as well as some of the Borders superstore assets^[4].

[edit] Trends and Forces

[edit] Increasing Online Competition

Part of the reason for declining sales growth in brick and mortar stores is the continuing increase in competition from online retailers, which take business (and margin) from brick and mortar sales. In the past, Borders has partnered with Amazon.com (AMZN), letting Amazon operate the websites of its subsidiaries in return for referral fees^[5]. In 2008, however, Borders is planning to take control of its own online store, Borders.com, ending the relationship with Amazon.com (AMZN)^[6]. Revenue from online sales accounted for a tiny portion sales under the partnerhip, as Amazon's online referral fees accounted for 1.2% of total revenue in 2006.

Borders (BGP) has turned on its website today after a seven year absence. The central feature at Borders.com is called the "Magic Shelf". Borders says the shelf captures the essence of shopping in one of its stores. Books are placed cover out and side by side on the shelf. Shoppers can move up or down and from side to side. Roll the cursor over a book and a box with details about it pops up. The shelf can be customized by the user and can show 20 shelves of titles and offers "just for you" picks based on past purchases.

[edit] Dependence on Bestsellers

Widespread availability of popular products online, at mass merchants (e.g., Wal-Mart Stores (WMT), at wholesale clubs (e.g., Costco Wholesale (COST) and elsewhere has forced traditional booksellers like Borders to cut prices significantly (up to 40% off suggested retail price for hardcovers) to keep customers coming into their stores. This price slashing has led to diminished margins in an important area of the book selling business. The impact of a single bestseller can greatly affect sales growth; for example, Waldenbooks comparable store sales declined 7.5% from 2005 to 2006 due primarily to the 2005 release of a popular Harry Potter title^[7].

This dependence on bestsellers is much more significant at mall-based stores compared to their superstore counterparts and Borders has a much greater exposure in to mall-based retailing compared to main competitor Barnes & Noble (BKS), which sold off most of its B. Dalton mall locations.

[edit] Digital Media Adoption

Younger generations of Americans are less interested in reading books than their older counterparts, having grown up in an era with more entertainment options. The advent of new digital distractions such as mp3s, online video and video games has led to decreased interest in more traditional forms of entertainment such as CDs and books. Borders saw comparable same store sales of CDs decline 15.1% from 2005 to 2006^[8].

[edit] Member Programs Increase Consumer Loyalty

Started in 2006, the Borders Rewards program has over 25 million members^[9]. Discounts for buying Borders products incentivizes customers to make Borders their destination, increasing brand loyalty. The Borders Rewards program is free, and has been reworked to provide more frequent payouts to a wider variety of customers. On the other hand, competitor Barnes & Noble's member program is not free and charges an annual fee.

[edit] Competition

Borders faces its main competition from other retail superstores as well as online booksellers. Retail giants like Wal-Mart and Target also compete with Borders in the market for books. Despite underlying negative industry trends, Borders (and competitor Barnes & Noble) have been gaining marketshare through the superstore format, and Borders is continuing to focus on this area by re-branding some of its Waldenbooks stores under the Borders Express name and closing the under performing Waldenbooks locations. In regards to offline book sales, Borders commanded a market share of about 21% and competitor Barnes & Noble had a market share of about 28% as of the 3rd quarter of 2005,

[edit] Traditional Retailers

Barnes & Noble (BKS): Barnes & Noble is the largest U.S. book retailer, operating almost 700 superstores. Borders' main competitor, Barnes & Noble may have a chance to expand its lead as Borders focuses on closing certain Waldenbooks stores and disposing of its international business. Barnes & Noble is less exposed to the decline in mall-based retailing than BGP, as it sold off most of its B. Dalton mall-based stores. BGP, on the other hand, is the largest mall-based book retailer in the U.S.

Books-A-Million (BAMM): Book retailer primarily in the southeastern U.S. operating 179 superstores.

[edit] E-Commerce

Amazon.com's huge bookselling arm partnered with Borders using an affiliate model, which contributed 1.2% of sales in 2006; beginning in 2008, Borders will go it alone with their own e-commerce offering.

[edit] Retail Megastores

Wal-Mart Stores (WMT) and Target (TGT) are the main retail megastores that sell everything from books and CDs to groceries. These retail giants have had an impact on the market for books. Bookselling is not a part of these companies' core business, but the increased availability of popular titles at these stores has led in part to the diminished margin on bestsellers.

[edit] Footnotes

1. ↑ ValuePlays Research
2. ↑ Borders Group (BGP) Annual Report, Fiscal year 2006, "Shareholders' Letter", p. 2
3. ↑ Borders Group (BGP) Annual Report, Fiscal year 2006, "Shareholders' Letter", p. 2
4. ↑ Borders Group (BGP) Annual Report, Fiscal year 2006, "Shareholders' Letter", p. 2
5. ↑ Borders Group (BGP) Form 10-k, Fiscal year 2005, "Selected Financial Data", p. 20
6. ↑ >Borders Group (BGP) Annual Report, Fiscal year 2006, "Shareholders' Letter", p. 4
7. ↑ Borders Group (BGP) Form 10-k, Fiscal year 2006, "Selected Financial Data", p. 21
8. ↑ Borders Group (BGP) Form 10-k, Fiscal year 2006, "Selected Financial Data", p. 21
9. ↑ Borders Group (BGP) Annual Report, Fiscal year 2006, "Shareholders' Letter", p. 3
10. ↑ Barnes & Noble (BKS) Form 10-k, Fiscal year 2006, "Selected Financial Data", p. 43
11. ↑ Borders Group (BGP) Form 10-k, Fiscal year 2006, "Selected Financial Data", p. 21
12. ↑ Books-A-Million (BAMM) Form 10-k, Fiscal year 2006, "Selected Financial Data", pp. 6-8