Borders: CEO Jones Not Responsible for Sins of the Previous Management

I have respect for Jeff Matthews and link to his stuff often, but this time, he misses...

Matthews writes:

The poster child of poor capital management might just be Borders Group. (BGP)

Borders, which runs one of our favorite book stores in the country (Union Square in San Francisco) is the now-beleaguered bookseller spun out of K-mart long ago in happier times.

Borders is also one of those companies that so desperately wanted to make Wall Street’s Finest happy—not to mention its own shareholders—that it spent all its cash, and more, to buy back stock.

“Returning value to shareholders,” it was called back in February 2005, when Borders management proudly announced a $250 million share repurchase plan, and the stock price was $25.

Wall Street’s Finest were, of course, delighted, and the company received the kind of “attaboys” that caused a long list of management teams to pursue the greatest value-destroying fad in American business history. In this case, it crippled a once wonderful chain of bookstores:

“The stock’s cheap, in our opinion, and the company seems to agree,” [hedge fund manager Bill] Ackman said last week at the Value Investing Congress in New York. Borders…has “one of the most aggressive share-repurchase programs I’ve ever seen.”

—Bloomberg LP, November 2006

In the end, of course, that repurchase program was far too aggressive.

Five years ago Borders had a $1.9 billion market value and more cash than debt on its books. Today, Borders has a $50 million market value (yes, that’s right, $50 million) and more debt than cash. Like, $525 million in debt against $38 million in cash.

Oh, and the stock’s current price? $1.00 a share.

“Returning value to shareholders?” No. “Mortgaging the future,” at best. “Destroying the company,” at worst.

What Matthews fails to acknowledge is that current CEO George Jones has only been at the company since July 2006. Jones' first act as CEO was to take back control of the Borders.com site from Amazon (AMZN). The site now has nearly 30 million rewards members. Second, he outlined the new concept stores Borders is building that are the company's most profitable. He then said he was going to lower the chain's inventory levels and reduce its huge debt load and both are down 30% and 40% respectively.

We all know that retail turnarounds take time and that time is painfully exacerbated in a recession and credit crunch like we are seeing. But we need to be clear that Jones has the company cash flow positive, has reduced debt and his vision for the new concept stores is a success. Here is a podcast Jones did in July 2007 after his plan was announced.

A recent Credit Suisse research report responds by saying this:

The improvement we have seen in just the last few months is very encouraging, and perhaps in a better macro environment, could make an interesting story. However, in an environment where the comparable-store-sales declines are worsening, its gap with its No. 1 competitor is widening, in a retail segment on the decline and shifting to other channels, and with technology threatening to change the business even further, we see limited upside from current operating levels and remain cautious on the stock.

Overall, we believe Borders management deserves credit for the progress it has made. In the midst of a challenging macro environment, the company has managed to cut costs without destroying the bottom line, has sold off business lines to focus on the U.S., and has positioned the company to survive.

Results for the third quarter, while worse than expected, showed lower expenses as promised, improved gross margins absent the fixed-cost deleverage from lower sales, better management of promotions, a significant reduction in debt, and much improved cash flow. The company also upped its cost savings target by $20 million to $140 million.

If we look further, I think someone would be very hard pressed to find a retailer whose shares sit higher today than they did in mid 2006 when Jones took over. Neither Target (TGT) nor Macy's (M), JC Penny (JCP), Home Depot (HD), Lowes (LOW), Sears Holdings (SHLD), Barnes & Noble (BKS) or scores of others sit higher today than they did then.

Were the actions of previous management ill planned? Yes. But let's be clear that current management is doing the right things to fix those mistakes.


Disclosure: Long BGP, WMT, SHLD

Comments

[bookseller ...:]

Mr. Sullivan, with all due respect, the current management at Borders has no clue whatsoever in running a retail business. They have confused strategy and tactics, botched the e-commerce roll-out, mismanaged inventory and made terrible strategic decisions.

They paid down their debt by returning merchandise. Books, CDs and DVDs are basically bought on consignment from publishers and distributors. Smaller bookstores have done this for years: returned merchandise for credit to keep new merchandise rolling in. Borders mortgaged its future with draconian cuts in inventory. This ensured lower sales. At the same time Borders cut already low staff hours and cut positions from stores. This reduced customer service.

Borders has engaged in a discount war with Barnes and Noble and Borders will lose that war since B&N has the cash to survive.

Borders also brought out their new e-commerce site a day late and a dollar short. Instead of just rolling out a competent site it added a Magic Bookshelf that delayed the rollout and cost the company cash and sales.

Borders has mismanaged its inventory horribly and is now ill-positioned to have anything but have a dismal 4th quarter.

I do not believe the concept stores are ore profitable for one second. It is a nice design but it is contrary to everything else Borders can do: more capital, more staff, more inventory.
Granted George Jones had a tough task when he took over but he has stumbled every inch of the way since. He can blame a poor macro-economy but he put the company in a terrible position.

Bill Ackman may have trusted Jones' judgment when he bought a third of the company for $12+ a share. I guess if he thought Borders was such a great buy he could now buy the other two-thirds.

Mr. Sullivan, if you think Borders is so great, buy it. I have a 40% off coupon.

2008 Dec 02 06:43 PM

[107Sid:]

Borders had an e-commerce initiative back something like seven or eight years ago, but unlike BKS which stayed the course, thru in the towel prematurely because its management couldn't stand the heat. Given the huge head start of AMZN and BKS the current initiative should prove to be a "nice try, but no cigar". Within most specialty retail segments there is room for only two longer term viable factors, and within the online book sector they have already been established--just as WMT and BKS have established preemptive leadership in the bricks and mortor retail book business. The BGP leases are of fairly long duration, thereby limiting its options with repect tot he closing of more marginal stores.

2008 Dec 03 04:40 PM

[burningprop...:]

I have to agree with the previous posts. Mr. Sullivan, you are nothing but an apologist for this company. You have demonstrated an utter lack of understanding (intentional?) of the retail book business in your myopic, soporific articles on Borders. Therefore, I don't trust anything you see fit to print.

2008 Dec 03 05:39 PM

[e-gal:]

"I do not believe the concept stores are ore profitable for one second. It is a nice design but it is contrary to everything else Borders can do: more capital, more staff, more inventory."

I could not agree more. Those of us who have worked in the trenches for Borders know how the scorecards are manipulated to make things seem more rosy than they are. A concept store where people can go to download things they can download at home is a good and profitable long-term venture? Pull the other one.

It's too late now, but Borders could have saved itself and provided for the next ten to twenty years of growth by a complete rebranding. Refocus on the original core business, and I mean ALL of the core businesses including music. What's that you say? MP3s have killed music stores? I'm a tail-end boomer, and consider myself an early adopter of technology, but I don't download. Sure I have an iPod, but I still want to buy CDs. Classical music fans don't download. Jazz fans don't download. Classic rock fans don't download. They want to browse, and hold something in their hand. Yes, those are generalizations, but true, nonetheless.

Borders should have rebranded itself as the place to go for the immediately available selection that you can't get anywhere else - whether it be books, music, or DVDs. Remember when we boasted that our flagship stores carrried 200,000 titles? Anybody and everybody can sell the top 200 bestselling books, movies and CDs. But ten years ago, if you decided to go on a Japan kick wanted to pick up a Kurosawa flick, a coffee table book about netsuke, a sushi cookbook, and the latest J-Pop CD, you could do that all in one trip to Borders. It was destination shopping. It was recreational shopping of the highest order. Shopping at a bookstore is justifiable even to those who resist commercialization and big box retail. It's justifiable even when money is tight.

Somehow Borders decided to compete with the rest of the retail world for the Joe Sixpacks shopping for those top 200 bestsellers that are already sold for less at Target, instead of branding themselves as the store of those who seek depth, breadth, and intelligent choices and who want a bookstore which will confirm to them that they are people of depth, breadth and intelligence.

The amazing thing is that so many of the things that made Borders what it once was were virtually free. Remember Penny University? That was a total labor of employee love! Remember when musicians performed regularly on Friday nights and were paid in 10 dollar gift certificates?

Sure, those things don't really work in a 450-store enterprise, but maybe Borders should never have grown that large in the first place. The constant growth was something of a Ponzi scheme, as all big box retail is in the long run.

It's all mindboggling. But had Borders required every person at HQ to spend two weeks a year in a store, on the floor as a bookseller, these things would have been obvious.

2008 Dec 04 09:00 PM

[sourgapes:]

I believe all of these posts (like e-gal admits) are from sophmoric people who once worked in a Borders Retail store and are just ticked off.

2008 Dec 05 08:04 AM

[bookseller ...:]

Dear Sourgapes,

I guess the market is sophmoric (sic) too. What is Borders doing right? If you feel so strongly, the stock is 66 cents--be my guest.


On Dec 05 08:04 AM sourgapes wrote:

> I believe all of these posts (like e-gal admits) are from sophmoric
> people who once worked in a Borders Retail store and are just ticked
> off.

2008 Dec 05 01:30 PM

[burningprop...:]

"...sophmoric (sic) people who once worked in a Borders.."

Twisted logic from you. Why would you believe in the success of a company that employed such people? Your post lacks content; just supposition, and judgment of other posters' content. Write your own bull opinion. Waiting to hear it.

2008 Dec 05 09:17 PM