Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TRANSCRIPT SPONSOR
MF logo

Borders Group, Inc. (BGP)
Q2 2007 Earnings Call
August 29, 2007 8:00 am ET

Executives

George Jones - CEO, President
Ed Wilhelm - CFO

Analysts

Matthew Fassler - Goldman Sachs Danielle Fox - Merrill Lynch Dave Weiner - Deutsche Bank Securities Fred Spees - Spees Thorson Capital

Presentation

Operator

Good morning and welcome to the Borders Group second quarter 2007 financial results conference call.(Operator Instructions) I would now like to turn the call over to Borders management. Sir, you may begin.

Ed Wilhelm

Thank you, and good morning, everyone. Thanks for joining us today. I'm Ed Wilhelm, the CFO of Borders Group and I'm here with our CEO, George Jones. We appreciate your time this morning.

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 yesterday afternoon and our most recently filed 10-K for information relating to forward-looking statements, including factors that could cause our actual results and plans to differ.

With that said, I'll turn it over to George for a review of the quarter.

TRANSCRIPT SPONSOR

MF logo


What you WON'T hear on the call!

In 1957, a young couple named Bill and Carol Angle invested half their life savings in Berkshire Hathaway. According to Forbes magazine, today it’s worth over $300 million. What if you could do even half or a third as well?

One stock looks uncannily similar to an early investment in Berkshire Hathaway. Get its name now in a new FREE report from The Motley Fool.

Read the complete report courtesy of Seeking Alpha FREE.


To sponsor a Seeking Alpha transcript click here.

George Jones

Thanks, Ed. Good morning, everyone. The second quarter was a good one for Borders Group, and I'm not saying that because our total results are yet where they need to be, or better said, where we know they can be, but because we made important progress in key areas resulting directly from execution of our strategic plan. Elements of our second quarter results provide strong evidence that what we are doing is beginning to work. We fully realize that we have a lot of hard work yet to do, but we're highly encouraged by what emerged in the second quarter. Our results give us confidence that our strategic plan is the right path to help us reach our goal of generating sustainable sales and earnings growth for the company beginning in 2008.

We're particularly encouraged by the improvement in comparable store sales across all business segments. Of course, record sales of Harry Potter and the Deathly Hallows led these results, but even without sales of Harry Potter -- this is important -- we improved our comp store sales in each operating segment. This is an important shift in the trend for us.

Specifically, at Borders domestic superstores, we increased comparable store sales by 4.6%. Excluding sales of the Harry Potter title we increased same-store sales by .4%. This is an improvement over the decline of 1.9% in same-store sales at our superstores in Q1. It is worth noting that we were already beginning to deliver consistent comp store sales growth during the six weeks leading up to the release of the Harry Potter book and the trend continued. In other words, our business had already started to turn before Harry Potter. This positive comp store sales results at Borders U.S. stores reverses a four quarter trend of negative comps, and we hope to build on this momentum.

As we announced, companywide we sold 1.2 million copies of Harry Potter and the Deathly Hallows on its first day and over 1.7 million copies total as of the end of the second quarter. I'm really proud of the job our stores did in rallying around this final installment in the Harry Potter series as well as selling other items including add-on sales of higher margin items within the cafe and within our gifts and stationary categories.

In the second quarter overall we also saw particular strength in the bargain book and children's categories as well as in the cafe and gifts and stationary categories. The process of converting our existing stores to Seattle's Best cafes is virtually completed now so the investment and disruption factors during the conversion process are now out of the way and we are looking at even more upside in the cafe category.

Another contributing factor to our success in same-store sales is leadership of our organization with Rob Gruen now heading merchandising and marketing and Ken Armstrong leading our U.S. stores. As you'll probably remember, both of these guys joined us in February and in that relatively short time they've made and continued to make significant headway in driving improved results.

I'm also happy to welcome Susan Harwood, our new CIO to Borders Group; yes, she's finally here. Susan started August 20th and we look forward to her contributions as we address the vast opportunity we have to leverage technology in our business and continue to address opportunities to improve our merchandising systems.

Our progress on execution has been reached through a combination of efforts including an ongoing focus on improvement in retailing basics such as effective use of key items, impulse items, feature tables, end caps and so on -- you've heard me talk about this before and it's really showing it's working -- merchandise presentation, effectiveness of marketing and promotions, and consistency of execution. We've also made significant process in changing the culture of our stores organization in that they are dramatically increasing their focus on driving sales within their individual stores.

In addition, we are becoming increasingly skilled at leveraging the tremendous asset we have in our Borders Rewards loyalty program. This program now has over 20 million members and it continues to grow rapidly. In fact, growth in membership has now accelerated to over 150,000 new members per week since we made changes to the program back in April to improve its profitability. It's actually accelerated since we made these changes. We're thrilled about the incredible interest our customers continue to show in this program.

I stated during our first quarter conference call, quite candidly, that one of the challenges we were facing was to increase customer traffic to our stores which had been on the decline. Well I'm pleased to report that our unique mix of promotional offers and compelling content delivered via email to these over 20 million Borders Rewards members is really helping drive traffic to our stores. In fact, our transaction count at domestic Borders stores increased by 5.5% in Q2 and notably improved in ten of the 13 weeks of the period; the three that didn't were the first three weeks of the quarter so we had ten in a row where it improved. Of course, Harry Potter was a big part of driving that traffic but only during the final two weeks and one day of the quarter. So again, even without Harry Potter we were seeing improvement and we're looking to build on that momentum through the power of Borders Rewards, among other initiatives.

Let me give you a quick example of the power of this Borders Rewards loyalty program and how it combines with our in-store merchandising to drive results. The first proprietary and exclusive novel that we published was Slip & Fall by Nick Santora, and it's a real success story. We discovered Nick. Nick was already recognized as a successful television writer but was really completely unknown as a novelist, hadn't done a novel before. We actually published this title for exclusive sales in our stores; the only place you could get it was Borders and Waldenbooks. We leveraged the Borders Rewards database, we prominently placed the title in our stores, we held signings with Nick and got the word out about this title which, again, is only available nowhere else except Borders and Waldenbooks, and this book made it to the Wall Street Journal's National Bestseller List, it's the number 5 on the Boston Globe's Bestseller List, it was on a number of other bestseller lists, it was named as a Hot Summer Read by USA Today. It's been a strong seller for us and we will continue to do more proprietary publishing because we have now proven that we can make bestsellers on our own which is one more way we will differentiate Borders from the competition. Moving forward Borders Rewards will continue to be a big part of helping us to do that. We have other examples as well in music, we're really utilizing this and proving we can really do something dramatic.

We talked about traffic but I also want to touch on average ticket and units per transaction. As you recall, we made solid strides in increasing both of these during Q1. In Q2, with the impact of Harry Potter and some issues with cycling against promotions of a year ago, our units per transaction dropped slightly by 0.7%, and likewise, our average ticket declined slightly by 0.9% and Harry Potter had a big effect on that. We expect to rebound on transaction size and units per transaction moving forward this year as our calendar normalizes.

Moving on to our Waldenbooks specialty retail segment. I'm pleased to report that we also saw improved comp store sales. Reversing a seven quarter trend of declining same-store sales at Walden, we ended Q2 with a 6.2% increase within this segment. Sales of Harry Potter and the Deathly Hallows were responsible for this increase, the same-store sales were flat without it. Yet this is a solid result for us as it reverses a longstanding negative trend that we intend to build on this momentum.

The improvement in our mall store business is due to several key factors. I think this is significant. Earlier this year, we reorganized our field leadership across the company, and in that process, we put in place dedicated leadership to focus on this business as distinct from our superstores. It really, frankly, had been sort of treated like a stepchild for a while. In addition, we focused a merchant team on the unique aspects of the mall business. Breaking this business out and focusing on its opportunities has greatly improved this operations and helped drive positive results.

Second, we are also driving what I think is a remarkable change in culture within the entire organization, but it is very evident of Walden, moving from an attitude where underperformance had really become the norm to an environment where it is no longer expected or acceptable. The energy of this team is up, very visibly up. The team is focused and we are at the point where a vast majority of the districts in the segment are exceeding plan. I'm excited to tell you that this culture is beginning to happen throughout the entire company, not just Walden, in all segments at the corporate office and throughout the stores. I'm delighted to see the enthusiasm and sense of urgency that we are starting to witness now within our organization.

We're also doing much better at Walden of using more effective signage and front of store presentation to draw customers who are shopping in the mall into our stores. That's been a big opportunity for us. As we are getting customers in our stores we're doing a better job of selling them more products, utilizing the same type of presentation and item merchandising strategies that are working for us in our Borders superstores. As you know, we see the right size for the Walden chain to be about 300 stores and continue to believe that that is still appropriate. So, we will continue to close stores towards our goal of creating a smaller but much more profitable chain.

Moving on to international. I am pleased to report that business in this segment also improved. Asia Pacific has long been a strong performer for us with a great management team in place and in Q2 this is part of our international operations continued to do very well. The U.K. where we've had some challenges in the retail environment is making a turn as our relatively new management team there is beginning to hit its stride and is driving improvements. Comp store sales within the international segment increased by 8.2% total including the sales of Harry Potter and notably 5.6% without Harry Potter. This is a strong result for a segment that saw comp store sales decline of 2.5% in the first quarter of this year.

At this time, I'll turn it over to Ed but want to leave you with the thought that while we have much heavy lifting still to do in the future to drive improved results, we've got a long way to go, a lot of work to do, we are really enthusiastic, however, about the signs of progress that we saw in Q2 and are working diligently to build upon that momentum this quarter and in the upcoming holiday season.

Ed Wilhelm

Thanks, George. I'll provide a quick financial overview before opening it up for questions. In the second quarter on an operating basis Borders Group recorded a consolidated loss of $15.3 million, or $0.26 per share. This compares to a loss of $14.5 million, or $0.23 per share for the same period a year ago. EBIT on an operating basis for the quarter was slightly better than last year and slightly better than our internal plan. We did make progress during the quarter in managing our inventories more effectively. Inventories grew by about 3% over last year while sales for the quarter increased by over 10%. In addition, we finished the quarter with our inventories under plan. There is still a lot more work to do in this area as improving inventory turn will be a significant cash generator for us in the future. While there have been some modest merchandising systems enhancements delivered to drive this improvement, most of it has been achieved through management focus and better buying disciplines.

Let me provide a quick update on the status of the strategic alternatives process for international. This process is moving forward as planned in both the U.K. and Australia-New Zealand, yet it is more advanced for Borders U.K. as we started there a bit earlier. Further announcements will be made in the future as appropriate.

Turning to financing, our press release notes the agreement we have entered into to amend our existing credit agreement. This agreement was reached with our existing bank group which provides financing to our company through our bank facility. These banks know our company well and are very supportive of our company's direction.

The amendment does three important things for us: first, it provides the financial flexibility needed to execute our strategic plan going forward. Secondly, the amendment allows us to proceed with the sale of our international subsidiaries; and finally, it gives us the option to seek term loan financing in the future should we decide to at some point to do that.

To close out our formal remarks this morning, I want to echo what George said earlier. We're in the very early innings of a turnaround for our company yet we are encouraged by the progress that we've made to date and unlike the first quarter, there are visible signs of that progress being shown in some key metrics that we've reported in the second quarter. We'll continue to build on that progress to achieve the financial goals we set out in our strategic plan.

With that, we'll open it up for questions.
Question-and-Answer Session

Operator

Your first question comes from Matthew Fassler - Goldman Sachs.

Matthew Fassler - Goldman Sachs

I'd like to ask you a couple different questions. Starting off on the Borders superstore financial results, your operating profit ex non-operating line items was down some, despite the despite the higher comp. I understand that obviously Potter was not a big money-making book for you but can you talk about the other moving pieces? This is before we get to the non-operating line, particularly the impact of the loyalty program?

Ed Wilhelm

As you noted, the Harry Potter discounts had a negative impact on gross margins across all businesses, but in particular, at Borders superstores. We did make changes, as you mentioned, to our loyalty program late in April at the end of the first quarter. Those changes were designed to do two things: Lower the overall cost of the program and to drive incremental sales. I would say that we're certainly pleased with what that did in achieving a lower cost, so we did see the kind of cost reductions from making those changes that we expected. On the sales side, I think that the sales kind of speak for themselves. We've seen increases in traffic even without Harry Potter so and the number of weekly memberships that we are getting continue to increase. So I think there was no negative impact that we've seen on either the sales side or the membership signup side. In fact, those things continue to move in the positive direction for us.

The other thing affecting Borders, Matt, on the gross margin line is we saw an uptick in shrinkage in the quarter and the good news about this is that it's a controllable item. We've mobilized plans and put plans in place to help reduce those shrinkage costs, but that also had a negative impact on the Borders margin in the quarter.

The SG&A increase that you saw for us on a consolidated basis, increases in strategic spending, most of that comes through the Borders superstore segment so the increase in spending for merchandise systems, the increase in spending for dot com, all of that, Matt, is coming through the Borders superstore segment.

Matthew Fassler - Goldman Sachs

You've given me a lot to chew on to follow-up with there, so on the SG&A expense you're talking about stuff that goes through the operating line items not the non-operating line items. How significant is the increase in that systems investment on the P&L?

Ed Wilhelm

It's an important part of our strategic plan and we're spending the necessary money to fix the merchandising systems and also we're on plan to launching our dot com web site in the first quarter of next year so the investment for that is taking place this year.

Matthew Fassler - Goldman Sachs

How big was the increase in shrink as a percent of sales at Borders?

Ed Wilhelm

You know, without getting too specific, it was notable, and again, a controllable item that we're acting quickly on.

George Jones

I'll say one thing about this to be more specific about it. This started coming in as we started hitting the cycle on stores earlier this year. I think the first time we saw it, it came in one cycle but its continued. The good news on this is it's very definable to being in one category of merchandise. It's specifically, if you take out everything else we have normalized, we're getting hit real hard within DVDs.

I think this goes back to about a year-and-a-half ago they made the decision to do some different things in terms of unlocking DVDs from a security standpoint and now we're starting to get inventory results, or delayed inventories for whatever they did for whatever reasons from before, we're starting to see the inventory results in from this change and we got hit really hard. I mean substantial enough that it makes a difference in the total shrink.

Immediately as this started happening, we've got a game plan in place here and we're starting to try to mitigate that. As Ed said, the bad news is it hit the margin, I guess what it means is our margins would have been better without a notable hit. The good news is we feel it's definitely fixable.

Matthew Fassler - Goldman Sachs

Following up just on the loyalty program, can you talk about the drag on your gross margin rate from the loyalty program, say, here in the second quarter versus where it was in the first quarter?

Ed Wilhelm

It's lower. This year compared to last year, Matt, or this year compared to the first quarter?

Matthew Fassler - Goldman Sachs

To the first quarter.

Ed Wilhelm

Both. It's lower cost to us in the second quarter than it was last year where we had a lot fewer members, and lower cost than where it was in the first quarter as well.

George Jones

We worked really hard in terms of trying to design this revised loyalty program to be lower cost to us because we thought the previous program, frankly, was just too expensive and plus not to mention the fact about how it really hurt us in fourth quarter last year and we're definitely going to avoid that this year with the way that it's laid out.

But the other thing was we really worked hard to do that while still making the program attractive. As we announced it and by the way, the jury's still out. It's not enough time to draw a conclusion on it yet until you get further. But I tell you, I had absolute confidence that it was going to cost us less. I knew that was going to be the case. The trick was how customers were going to accept it and if it hurt us any by changing it.

Well, I think one thing, it's really interesting to me, I would have never I don't think, predicted that the actual enrollments would start going up, particularly after a program has been around this long. But it's clearly accelerated consistently; it's clearly accelerated in terms of the number of enrollments we're having on the program which is a good thing and, frankly, the customers didn't seem to be accepting it well. I mean that's evidenced by the sales.

We're finding this is increasingly a better and better tool as we get better at using the short list to drive customers in our store. Any of you that actually get our short list or look at it each week, you'll see we're starting to put more original content on it, the things we're doing with author interviews , it's become really an entertainment thing as well. This is not going unnoticed by publishers, by the entertainment industry, by other people as well that are really eager to partner with us on this. So this is becoming a really, really, really measured tool for us.

Matthew Fassler - Goldman Sachs

I do have a very quick follow-up which relates to non-operating costs. If you could give us some sense as to what those are going to look like over the remainder of the year?

Ed Wilhelm

I'll describe, Matt, what the non-operating costs were for the second quarter and I'll talk about what each of those components look like going forward. I would break down the non-operating costs in the second quarter into four buckets: California overtime settlement, obviously, is done and behind us now. The fees associated with and the cost associated with the international strategic alternative process, and as that process comes to a close those will be behind us. We had some severance related to some management changes that are taking place, and as George mentioned, we've by and large got the management team in place that we're happy with, and those are for the most part behind us. The last piece is cost related to store closures and relocations and that's probably the one piece where there's still some more work to do and that will depend on what opportunistic buyouts there might be for Walden store closures, for example, or some opportunistic relocations of some Borders superstores that we'll take advantage of.

Matthew Fassler - Goldman Sachs

So the $10 million or so operating losses, how much of that related to the last one?

Ed Wilhelm

They were pretty evenly spread amongst the four buckets that I described.

Matthew Fassler - Goldman Sachs

So California, every time you quantify it, it sounds like the fees and severance were actually significant so if you strip those away, it was much smaller?

Ed Wilhelm

Right.

Operator

Your next question comes from Danielle Fox - Merrill Lynch.

Danielle Fox - Merrill Lynch

Good morning. I was wondering if you could talk a little bit more about the general outlook for SG&A? It looks like the spending started to step up in the second half of last year, and I think you mentioned that some of your initiatives would continue into the first quarter of next year. When might we start to see the rate of increase begin to moderate so that you could achieve leverage on what in this quarter was a very, very strong comp?

Ed Wilhelm

Yes, when we, a lot of the spending is both merchandising systems related and then dot com related as we're building our dot com web site capabilities. The dot com spending, be virtually complete early next year, and in addition to slowing the spending down as it relates to that we'll start to generate some revenue from an ecommerce web site that will help leverage the costs that we have. The system spending will probably continue into next year but hard to say at this stage, but the expectation is that it's not going to continue at the same rate that we're seeing today; but again, that's a little harder to predict.

Danielle Fox - Merrill Lynch

So this isn't a permanent change in the cost structure? It really is an elevated level of spending?

Ed Wilhelm

Absolutely.

Danielle Fox - Merrill Lynch

A similar question on the gross margin. It looked like the trend improved on the gross margin line relative to the last four or five quarters, and I'm wondering, should we expect a more stable gross margin from here on out or was there something unusual that you did in this quarter that allowed you to show so sequential improvement?

Ed Wilhelm

The three components that I described as it related to the Borders profitability are all kind of notable for the quarter. Harry Potter discounts certainly had a negative impact on margin. The structural changes we made to the Rewards program helped gross margin and that's going to continue for us. The shrinkage opportunity that we have going forward is to lower the shrink cost and that hit that we took this quarter, again, being notable, should come down over time as we get our shrink costs under control.

George Jones

I will say, however, make no doubt about it, we're still in a very competitive environment out there and we find that we have to compete in that and I don't see the environment getting any less competitive going forward.

Danielle Fox - Merrill Lynch

Harry Potter actually had a much bigger contribution to this quarter than it did to prior quarters with Harry Potter. I think in the last two quarters where you had the Harry Potter release you did closer to a 2 comp, and I don't recall ever seeing over 400 basis point contribution from Harry Potter. You mentioned a lot of the changes that are going on broadly in the store, but was there anything specific about the way you promoted Harry Potter itself that maybe allowed you to capture a bigger portion of sales from the event?

George Jones

Well it's interesting. I wasn't here for the previous Harry Potter releases so I can only say what people have told me, but we certainly looked at it very closely. Our Harry Potter release and the events around it were very, very thoughtfully planned. I think if you look at what we did in terms of releasing this it wasn't just we did a good job on preselling it, which we did, but the events we had for the launch of it, we had over 800,000 customers that showed up at our stores around the country and we didn't just concentrate it just in the New York market or a few places like that, we really had it spread across the country. We did this, I think, cost efficiently, but still created a lot of excitement in our stores for it. We did really well.

I'll tell you another thing that we did is we did a much better job, I know than we've done before as far as after we got the people in the store just being able to sell them something. This showed up; we examined this closely and you know how much emphasis I've put on the fact of how we merchandise our stores and what we do when we get people in we saw this as a great opportunity if we get people in the store to try to sell them something, and we did. I think generally the feedback we've had from customers besides just the numbers we've had really goodwill come back from this and I think we managed this from the standpoint of our field operation and our promotional people and marketing have managed it, I think, was very well done and my hats off to them on that.

If you look at the pure number that we sold on Harry Potter and you look at it relatively versus some of the other numbers that have been out there, I think you'll see the strength we had in this. We did a really good job on this. By the way, we did not do it on price. We were not the lowest price guy out there. We made no attempt to be a price leader, we stayed competitive on price, but think were people out there priced lower than us.

Operator

Your next question comes from Dave Weiner - Deutsche Bank.

Dave Weiner - Deutsche Bank

A follow-up to Matt's question from earlier on the membership program. I just want to make sure that I understood the answer. Comparing this year's second quarter membership program versus last year's, you're saying that the net gross margin impact from those relative programs was down so was that a net benefit year over year?

Ed Wilhelm

Yes, the cost was down. It was a positive impact on our gross margins.

Dave Weiner - Deutsche Bank

In terms of the number of people kind of hitting the Borders Bucks bogey, the $150 for the quarter, was that in line with your expectation, the number of people who actually spent enough to earn a discount?

Ed Wilhelm

Generally in line with the expectation, sure.

Dave Weiner - Deutsche Bank

I guess I would have thought that there would have still been a negative impact year-over-year if that was the case.

Ed Wilhelm

Well, given the fact that we ended this year with about 19 million members at the end of the quarter and last year we had about 9 million members. We had an increase in the membership base year-on-year of plus 10 million members but again, the average cost per member is down, and that's exactly the way we designed the changes to the program.

Dave Weiner - Deutsche Bank

A question on store labor. What kind of changes have you made on the store labor line in terms of cutting or keeping the labor the same and how is that going to change for the remainder of the year?

George Jones

We very specifically have not put initiatives out there to cut labor. I'll say this. My feeling was as we did things that I wanted to get the improvements back out of better merchandising, et cetera. I think one of the things that's one of the easy ways to show quick improvement when you come into a company is just cut the hell out of all the labor in the stores. I don't believe in doing that. Basically, I wanted to be able to try to build this and still keep our service levels up in our stores. We didn't cut labor at all.

I'll tell you, what we have done, though, is in looking at it on an a store-by-store basis, we've done a really good job of managing our payroll and our payroll has come in right, the numbers have come in right on it and since Ken has been here I think they've really got a great handle on this. We're not having any real negative feedback from the stores that we're doing anything crazy. It may be some cases of balancing out some, but we're managing our payroll well, so I feel real good about that.

Dave Weiner - Deutsche Bank

On the supply chain and distribution for the superstores, could you just recap what some of the major challenges are there?

Ed Wilhelm

When you say supply chain?

Dave Weiner - Deutsche Bank

I mean in terms of whatever kind of investments you're making on improving distribution to the store?

Ed Wilhelm

The investments, the physical network investments are completed. We've got the Northeast facility which we brought up on line last year and we are still doing some consolidating, some of the existing facilities and closing them down and relocating them back into our three primary facilities but the investment for the physical network is complete. There's still some systems investment that we need to make on the distribution systems side but that's tied into our distribution and merchandising systems initiative.

George Jones

One of the things I've said previously about the things that happened over the past number of years that led to our decline in market share and some of the things, in a lot of the cases it wasn't as much of bad decisions that Borders made in terms of things they did wrong as it was things that we didn't do that perhaps our competitors did do more effectively. Distribution and supply chain and systems and things like that are good examples of these.

As Ed said, I think if you look at the issues that really affect our turnover, our inventory management, are all of these allocation things like this in terms of managing our inventory from the whole supply chain factor, part of the distribution centers, and as Ed said, I think they've made investments and we've done good things on those. The other part of it comes back to the systems which is I've certainly talked a lot about. We clearly still have deficiencies there on that. We don't have, if you look at versus what a normal retailer I would expect would have in terms of automated replenishment or what our competitors have, we've got a ways to go there. That's the reason we're making the investments in that, that's the reason we've made the changes in bringing in the new leadership in IT and the things we're doing on that to get it on track. So there's still opportunities there that will still increase.

I will tell you this, though, that I'm really proud of what we've done with not a lot of systems. There, too, we've got our inventories back under control and we started the quarter and we talked about this that our inventories were overstocked and we had some work to do as we started the quarter. So we went from an overstock position there, notable, to the fact that we're actually under inventoried by a healthy amount and a healthy -- I mean not severely under inventoried -- but where we'd like to be at the beginning of this quarter; and again, that was done by diligence.

It was done by really digging in and really trying to manage it intelligently. It was not done by a slash and burn thing that says cut off orders or something that's going to hurt our sales, it was done much more surgically. This is something that, again, we put a lot of effort in this on our people and, again, Rob Gruen and his team have worked real hard on that and I think it's really paid off for us.

We still believe we have big, big opportunities in terms of managing our inventory levels more effectively with this type of efforts as well as systems. We have the distribution centers now in place and we expect as we get the systems in place we'll start catching up to where we really should be on our inventory turns.

Operator

Your next question comes from Fred Spees - Spees Thorson Capital.

Fred Spees - Spees Thorson Capital

The cost of the Rewards is down because the front end cost is down or have you changed the way you accrue the bank you've been developing of how much is going to be redeemed? Is there any accounting aspect?

Ed Wilhelm

It has nothing to do with the accounting, Fred. It has everything to do with us lowering the cost of the program, the benefits that members receive.

Fred Spees - Spees Thorson Capital

Okay. So you're still accruing that?

Ed Wilhelm

We're accruing it as required, yes.

Fred Spees - Spees Thorson Capital

You put out some pretty robust numbers that you expect to get in a few years, and I assumed you'll revisit those with us, I'm sure you're doing it internally, but the same-store sales that you need to get those numbers, are they similar to what you have now or what assumption do you have there?

George Jones

We still plan on increasing our same-store sales and we think that's very doable. I will mention though, because you know we talk about where we are now and again, versus our plans et cetera, too, but I'll tell you as far as our financial plan that we have that we projected out for where we wanted to be at this time versus not modified but from the original numbers that we started on with the first of the year, we're ahead of plan. We finished the first half of the year ahead of plan in terms of our profitability and where we wanted to be.

Ed Wilhelm

Fred, our long range plans assume that Borders superstores can grow their comp store sales in the low to mid single digits so this quarter being at a 4:6 we're at the high end of our longer range plans, but again, the plans do assume that Borders grow the same-store sales in the low to mid single-digits.

Fred Spees - Spees Thorson Capital

Low to mid, okay. How much do you think you can take out of the inventory?

Ed Wilhelm

Well, improving turns from 1.6 which we've been at historically to 2 generates about $200 million of cash for us. So that's the proxy of what would come out of inventories.

George Jones

Longer-term if we were able to get it, say, to 2.6 which is where our major competitor is now, it'd be $500 million.

Operator

At this time there are no further questions.

George Jones

I guess that's it for this morning. We'll talk again when our third quarter results are issued in November and I thank you all for your time today. Thanks.

TRANSCRIPT SPONSOR

MF logo


What you WON'T hear on the call!

In 1957, a young couple named Bill and Carol Angle invested half their life savings in Berkshire Hathaway. According to Forbes magazine, today it’s worth over $300 million. What if you could do even half or a third as well?

One stock looks uncannily similar to an early investment in Berkshire Hathaway. Get its name now in a new FREE report from The Motley Fool.

Read the complete report courtesy of Seeking Alpha FREE.




To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Source: Borders Group Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts