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Borders Group (BGP) has struggled to find its footing in the book retailing segment dominated, at least recently, by the likes of Barnes & Noble (NYSE:BKS) and Amazon.com (NASDAQ:AMZN). The company, whose stock spent a significant amount of time below $1 last year, has finally capitulated to the reality of digital book sales. They have linked up with Kobo eReaders, which make a basic eReader device for a fraction of the price of Amazon’s Kindle, Apple’s iPad, or BKS’s Nook. Selling for $149, the Kobo will represent the low end of the eReader market appealing to those that strictly want a device for reading rather than the bells and whistles (and price tag) of the others.

Borders, which owns 25% of Toronto-based Kobo, is not looking to create fat profit margins from this device. Instead, we believe this is a land grab in an increasingly crowdedBGP space. However, the eReader market is growing rapidly and is expected to more than double this year according to Bloomberg.com.

Borders is entering a growing market led by the Kindle and Sony Corp.’s Reader. U.S. Sales of digital reading devices will grow to 5 million this year from 2.2 million in 2009, the Consumer Electronics Association, a trade group, estimates. Sales of digital books in the U.S. more than doubled to $313 million last year, according to the Association of American Publishers. – Bloomberg.com 5/10/2010

Consumer electronic devices have become increasingly commoditized (see also PND’s and cell phones), but what makes the eReader attractive is its ability to distribute content. Borders plans to unveil their eBook store next month, and it is the real reason why Borders is attempting this land grab strategy with Kobo. Borders is late to the game compared to competitors, but with the cheapest device on the market it hopes it can still grab a slice of this growing market.

There has been a wave of favorable financial news coming from Borders as they recently successfully renegotiated their debt and a much better than expected 4th quarter enabled them to post a profit in fiscal 2010. Profitability has been elusive for the firm as they have dealt with slowing sales since their 2007 peak. With the bricks and mortar stores losing relevance by the day, Borders hopes that this strategy provides a way forward. That said, they need to continue to shut down their worst performing stores and allocate resources to ventures with the best potential for growth.

At Ockham, we have a Fairly Valued stance on BGP as of this week’s report, although we do not like to admit that the traditional book store may soon become extinct. However, the reality is that comparable store sales trends have been just horrendous and the best remaining avenue for growth is in digital books. Borders needs to make a splash with their Kobo because otherwise it is difficult to see where the growth will come from.

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Source: Borders Banking on the Low End of eReader Market