Borders: 4th Quarter Earnings Show Positive Signs

I finally got around to reading the Borders (BGP) earnings call and the takeaway for me at least was very positive.

A couple of things struck me:

1. Guidance
   Despite a 2% comp sales increase number last year, guidance for the current year was, in the words of CEO George Jones, "very conservative," especially "given the current environment."

2. Cost cutting
   DVD "shrinkage" (read: theft) was $20 million last year. The company has both made changes to security measures and will be reducing the number of titles sold and the expectations are for this number to fall dramatically.
   
   Inventory ended the year at $1.3 billion and change, essentially flat over the previous year. Now, the company is moving towards a "face out" strategy on books that will reduce the number of titles sold at stores. The results will be a dramatic fall in carried inventory at the store level. This savings drops immediately to the bottom line. The locations that have the "face out" shelving carry 20% fewer titles yet are seeing double digits sales growth.
   
   The dividend was stopped (for now) and that will save $25 million and change.

3. Selective Promotions
   The Borders Rewards program now sports a membership of 25 million people. The importance of this is huge. It allows Borders to track purchases from its members and then tailor promotions to maximize their value. Retailers have been using these programs for years but Borders is only now getting involved. The tie in with the upcoming website launch will allow email-to-purchase marketing previously not available on this scale to the company.

4. Borders.com
   The heavy costs involved with rolling out the site are done. Their estimates were not given but, looking at the site, one ought to assume they were substantial. It is important to note that in the previous year, Borders reaped no benefits from that investment. This year it will both reap the benefits and see a decrease in costs. CEO Jones said that he expects CapEX to fall from $200 million to "around" $140 million.

5. Sale of assets
   The minimum that will be raised is the $125 million offered by Ackman. The company only has a market cap of just under $400 million at the current share price. It could conceivably buy back 25% of the shares and have cash left over for operations or debt repurchases.

So where does this leave us? A cursory look shows $80 to $100 million in cost cuts available without any real effort or impediment to operations. The inventory reductions should be over an additional $100 million as the stores (not the company) begin stocking fewer titles.

Borders lost $157 million last year and it looks as though it could easily cut its way to break-even or better this year now that much of heavy lifting in investment has been done. This assumes the above guidance is correct. Should that guidance prove to be conservative, results could improve even more.

Disclosure: Long BGP.

Comments

[Michael57:]

Is it still a Borders store if inventories are dramatically reduced? The jury is still out on whether the public will still consider them a "superstore" when they don't have depth of inventory. If all they are is a glorified Wal-Mart with a cafe, this is the beginning of a death spiral.

2008 Mar 28 11:23 AM

[BiblioTech:]

I agree, Todd. Here's a company whose revenue and earnings numbers, while less than those of Barney and Noble, are valued as if they were less than a seventh as much. This company is still pulling in, on average, over a billion (while I like to think of as a thousand times a million) dollars in revenue per quarter. They just sank a lot of money into their website (as non-recurring costs, I assume, on their balance sheet), and, yes, book sales are competing with new technologies, but there's a bottom there somewhere, and Borders provides value beyond its books. If you're a two-income family out late with a family, where do you take them to while away some time - a tavern or a big-box bookstore? For a snack - into a hellish mall and food court, or into a small Borders cafe? For magazines, where do you go? For impulse purchases of books? For specialty books that aren't carried by Wal-Mart? For books you need today, not in two days (and without shipping costs)? Borders owns "place-space," which means it's a destination location that you can wander around in. When Borders opens its website, all those Borders loyalty card holders (all 25 million) will have a reason to make their online purchases from Borders instead of Amazon. Ka-ching! This stock was less than $4 a share several days ago; it was $40 a share a number of years ago; it was in the mid-twenties less than a year ago. And now its share price is about a fifth of the price of a share of Barnes and Noble. Let me ask it this way: Are there 5 times as many Barnes and Noble stores? Does Barnes and Noble run its stores 5 times better than Borders? Is its revenue 5 times greater? Is it expanding 5 times faster? Is there something so unique about Barnes and Noble that confers upon it 5 times the aggregate value of Borders? I would propose that books, while a discretionary purchase to some extent, are a lot less costly than, say, taking a family of four to a restaurant. And look how minimally sales and operating earnings have been affected so far, despite the advent of Wal-Martian competitors, technological time-diverters, and a slowing economy. It may not be a $40 stock, but even at two-thirds the value of Barnes and Noble it ought to be in the low twenties (retail stocks, of course, rise rip-roaringly out of recessions, so the first ones in the pool . . . well, you know the rest). So what if inventories are reduced? Borders is not Wal-Mart, and no one with the right eyeglass prescription would ever confuse the two anyway. The damage that a Wal-Mart or an Amazon can do to the big-box bookstores is already evident, and the population that prefers the occasional bricks-and-mortar experience to the online non-experience has already demonstrated that they can pump billions of dollars into Borders coffers. Now, just imagine what a little fine-tuning of management will be able to accomplish.

2008 Apr 03 11:51 PM

[Lisa:]

I agree with this:


On Apr 03 11:51 PM BiblioTech wrote:
> If you're a two-income family out
> late with a family, where do you take them to while away some time
> - a tavern or a big-box bookstore? For a snack - into a hellish
> mall and food court, or into a small Borders cafe? For magazines,
> where do you go? For impulse purchases of books? For specialty
> books that aren't carried by Wal-Mart? For books you need today,
> not in two days (and without shipping costs)? Borders owns "place-space,"
> which means it's a destination location that you can wander around
> in.

But this bit is wrong:

When Borders opens its website, all those Borders loyalty card
> holders (all 25 million) will have a reason to make their online
> purchases from Borders instead of Amazon. Ka-ching! This stock
> was less than $4 a share several days ago; it was $40 a share a number
> of years ago; it was in the mid-twenties less than a year ago.

Why? Because Borders will always be more expensive than Amazon due to the sales tax issue.

2008 Apr 06 09:41 AM