Borders Group, Inc. F1Q09 (Qtr End 05/02/09) Earnings Call Transcript

| About: Borders Group, (BGPIQ)

Borders Group, Inc. (BGP) F1Q09 Earnings Call May 27, 2009 8:00 AM ET


Mark Bierley – Chief Financial Officer

Ron Marshall – Chief Executive Officer


Analyst for Matt Fassler – Goldman Sachs


Welcome to the Borders Group, Inc. first quarter 2009 financial results conference call. (Operator Instructions) I would now like to turn the call over to Borders Group CFO, Mark Bierley. Sir you may begin.

Mark Bierley

Good morning everyone. I am here with CEO Ron Marshall, and we thank you for being with us today.

Before we begin, I need to point out that this conference call includes forward looking statements. These statements, among others, include sales and earnings expectations and information related to corporate initiatives. Please refer to the news release issued last evening and our most recently filed 10K for information related to forward looking statements, including factors that could cause actual results and plans to differ.

With that I will turn it over to Ron for a few brief remarks.

Ron Marshall

Good morning. As you know from our last conference call we have four priorities at Borders. First, getting our financial health in order. Next, re-engaging with our customers and reclaiming our status as the book seller for serious readers. Third, improving execution throughout our company. Finally, addressing dis-intermediation within our business particularly as it concerns music and video.

In the first quarter we continued to strengthen our financial structure. Adjusted EBITDA in the first quarter was $3 million compared to a loss of $14 million a year ago. Operating cash flow improved by over $19 million over last year as we cut another 48 in expenses and reduced inventory by nearly $255 million.

Debt at the end of the quarter was reduced by $266 million to $326 million, a 45% reduction over the same period last year. I should note that first quarter debt was also under our debt level of fiscal 2008 by over $10 million or about 3%.

We continue to maintain the fiscal discipline that drives these results and remain committed to strengthening the financial structure of this company. Mark will cover other financial results with you in detail later but clearly we have a lot of work to do before we consider our turnaround complete. We fully realize we cannot save our way to prosperity. We have to sell our way to success and that is where we engage with our customers and improving execution come in.

We have rolled out chain-wide a service program that calls for our facilities to actively re-engage with our customers when they enter the store. A big part of this effort is encouraging our associates to share their book recommendations with shoppers. We employ people who are absolutely passionate about books and have great insight to share with our customers who come looking to us for guidance. It is about making that personal connection with the customer and then for the customer with meaningful title recommendations.

Hand selling is nothing new, but the results can be dramatic as we have shown and applied in a focused, consistent way across our entire chain. Of course, we must have the right books in our stores to meet customer needs. In the first quarter we did a lot of work often in collaboration with publishers, to refine our assortment and simplify how we present our selection to customers. The assortment work is about done and new product is flowing into our stores.

By the end of June we will be re-stocked with more of the titles our customers want and they will find it easier to shop us too. We will re-stock our stores as expeditiously as we can but while in the process we will have some momentary disruptions and possible impact on sales. We will be better positioned for the long-term.

This assortment work is critical. As Borders moves decisively late last year to generate liquidity the company dramatically reduced inventory. At the time, this was a necessary step and the right thing to do. Still, it left us with gaps in our back flow selection that frankly continues to hurt sales. It is tough to quantify this impact but we know it has been a factor. It has taken us an extended time to recover but we look forward to seeing the top line improvements resulting from what we are doing now to fill these gaps.

We also collaborated with publishers to shorten order cycle time, moving from what has been a traditional 12-week order cycle to four weeks and now to two weeks with our major publishers. Ordering in shorter intervals helps us stay more agile in responding to title trends, reduces the safety stock we used to carry and will help us reduce returns.

Disintermediation, our fourth priority, has clearly had an impact on our business with the multimedia category as digital options have overtaken physical CD and movie sales. We have been addressing this impact over time in our stores by reducing floor space and inventory to both multimedia. In the first quarter we executed a specific sales based plan to effectively rationalize multimedia inventory in all stores beginning with vast reductions in product within the bottom tier stores.

As we continue with this effort we are freeing up space to expand growth categories such as Children’s, Cooking, Wellness, Working Books and others. Again, the expansion of these categories in the space formerly held by multimedia will create a short-term disruption and possible sales impact but it is right for the long-term.

Children’s, for example, is a category that is under-developed for us and where we have significant opportunity for growth. As a reminder, the Children’s category includes everything from infant and toddler books to independent readers and up to young adults. All of these segments represent opportunities for sales and profit improvement.

We have seen an explosion in the young adult category and are expanding the selection in all of our stores while shifting Young Adult to its own area adjacent to kids which offers a more mature shopping experience to appeal directly to this age group.

Overall, our company must develop the same sense of urgency in addressing top line that we have displayed in meeting our bottom line challenges. This requires an organizational shift to a selling culture that requires speed, resiliency, creativity, absolutely commitment to driving results and consistency in execution.

It is a tougher challenge in this economy and we have a long way to go but I am confident we have the opportunity to significantly increase sales and profit that we need to see to seize it.

With that I will turn it over to Mark.

Mark Bierley

Thanks Ron. As reported in the first quarter at Borders Superstores, comp store sales declined by 13.5%. This result was driven in part by a decrease in comps within our multimedia category as we continued to implement the planned inventory and space reduction that Ron talked about.

By the end of the first quarter we had removed 1/3 of our total multimedia inventory compared to last year. This reduction in addition to overall declining sales trends in these categories drove comps for music that were down 28% and DVD comps that were down 22%.

While this inventory reduction contributed to negative comps, it gives us the opportunity, as Ron said, to increase inventory and space devoted to growth categories such as Children’s, Cooking, Bargain Books, Wellness and Paper Chase gifts and stationery products. In fact, our total Children’s category had a positive 3.4% comp in the first quarter.

Certainly the Stephenie Meyer brand was a big part of our success in the Young Adult portion of our kid’s business but even without Meyer, Young Adult was up on a comp basis by 18% giving us good reason to invest in the Children’s business.

Paper Chase generated a positive 2.3% comp in the first quarter and is another great example of a category that holds much more potential as we expand growth businesses and contract others within our stores.

The comp decline of 5.5% at Walden Books in the first quarter primarily reflects the impact of continued store closures as we right-sized the chain to allow for focus at our best performing stores. Of course as we address sales across our business we are also aggressively working to improve our gross margins. We made progress once again in the first quarter and I will walk you through the components that worked for us during the period.

Superstore product margin improved by 100 basis points over last year due to product mix which shifted to higher margin categories such as bargain books, café and paper chase with less of the mix coming from multimedia which are our lowest margin products in the store.

Promotional discounting improved by 10 basis points. We continue evaluating the return we are getting on promotional programs and will maintain our focus on positive gross margin dollars from promotions in 2009. Shrink improved by 20 basis points driven by improvements in Café waste and the control actions implemented in the prior year to reduce DVD shrink.

Supply chain costs improved 60 basis points since we continued to focus on the efficiency of our inventory order in process as Ron highlighted. These improvements were offset by 180 basis points related to music video sales promotions we executed to help drive down inventory levels in these categories and the mix of our business to the total business.

These two factors overshadowed the progress we made and resulted in a decrease in operating gross margins of 110 basis points of which 60 basis points was due to de-leveraging and occupancy. As Ron noted, we made significant progress in improving our overall cost structure in the first quarter. Operating SG&A was reduced by $48.1 million driven by store payroll and store expense efficiency as well as reduced corporate overhead costs. Supply chain costs were reduced by $8.6 million given our continued focus on the supply chain. We continue to track on our estimated $120 million of expected cost savings for 2009.

Turning to our balance sheet we reduced inventory by $22 million from year-end with multimedia driving the majority of the improvement. Debt was reduced by $10.3 million from year-end levels driven primarily by our cost reduction, inventory improvement and our prudent use of capital. I want to note that we are in compliance with our debt agreements as of the first quarter 2009.

We significantly reduced capital spending in the first quarter of this year to $2.4 million compared to the $27 million invested in the first quarter of 2008. Our view for 2009 is that we will continue to decrease capital spending and have very little committed for this year. This is prudent given the current economic environment and our expectation of continued negative sales trends for the year.

Before I close out my remarks today I want to note that we have provided a summary table of non-operating charges in our press release last evening. These charges were primarily non-cash and totaled $70.1 million or $1.17 per share in the first quarter.

That’s it for my recap. Now we will open it up for questions. Operator, will you take the first question please?

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Matt Fassler – Goldman Sachs.

Analyst for Matt Fassler – Goldman Sachs

You mentioned promotional discounting contributed 10 bips to your improving product margin. Any other thoughts on the promotional environment or are things pretty consistent broader speaking with last quarter?

Ron Marshall

I think you are seeing much deeper promotional spending from everybody in the category right now. We have seen some offers from other folks that are really quite impressive. What has been important in our improvement is being smarter about how we allocate those dollars and as we go forward we are looking at a lot of promotional opportunities that don’t directly tie to a discount coupon or going straight to the price button. I think as we go out in the middle of the second quarter you are going to see some stuff that is pretty creative from us and really creating an environment that is fun but yet provides a value image for our customers.


At this time I am showing no questions.

Ron Marshall

That’s great. I want to thank everyone for being with us today. Before we sign off we want to remind you that our next scheduled financial news release will be our second quarter results at the end of August. Have a nice summer guys.


This concludes today’s conference. Thank you for participating. You may disconnect at this time.

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