Borders Bounces Back

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 |  Includes: BGPIQ, BKS
by: Mark Riddix

Shares of Borders Group (BGP) shot up 47% Thursday to $2.54. Is this the start of a revival for Borders shares or just a dead cat bounce? Let’s take a closer look at the country’s 2nd largest bookstore chain.

The Good News

1. Borders shares rose after the company reported that it was able to repay a $42.5 million dollar note from Pershing Square Capital. Borders also announced a positive earnings report for the 4th quarter. Earnings per share was nearly double 2009 at 91 cents. The firm’s net profit rose to $60 million dollars. Borders produced a better 4th quarter earnings report than most Wall Street analysts were expecting.

2. Borders gained $700 million in debt financing, pushing the retailer’s debt maturities back to 2014. This should give Borders some breathing room considering that the original debt was due to mature in 2011.

3. Borders is partnering with Kobo to release an e-reader. Borders is counting on the e-reader to make the firm competitive with the Nook and Kindle. The Kobo e-reader only costs $149 which makes it cheaper than most e-readers.

The Bad News

1. Borders had sales of $946.5 million which is a drop from last year’s $1 billion dollar sales figure. Borders profit increase did not come from earnings growth but from cost cutting (store closings, employee layoffs). Borders' biggest problem is that the firm has no organic growth. The same store sales numbers were dreadful. Same store sales (comps) declined 14%, which is nearly 3 times the rate at Barnes & Noble (NYSE:BKS). While the company is doing everything that it can to survive, Borders can only cut costs so much. The forecast for earnings growth for the next 5 years is projected to be 0.2%.

2. Borders should have entered the digital content arena when the Nook and Kindle launched. With the iPad set to launch Friday, Borders' e-reader may be too little too late.

3. Borders' business model is near extinction. According to Marketwatch, Amazon (NASDAQ:AMZN) and Wal-mart (NYSE:WMT) are taking market share from traditional bookstore chains with their discounted pricing model. Barnes & Noble, the number 1 book retailer in the U.S., is fighting to stay afloat in the bookstore industry. Now you have Apple (NASDAQ:AAPL) entering the fray with its tablet PC. While there will always be a need for bookstores, the retail book market does not appear to be large enough for both Borders and Barnes & Noble.

I think that Borders deserves credit for the changes that the company has made and I believe that these changes will benefit Borders over the short term. However, none of these fixes addresses the long term problems. Borders stock might be a decent trade for the speculative investor but I wouldn’t consider buying shares for anything more than speculation.

Photo by: markhilliary