Borders Group, Inc. F1Q08 (Qtr End 05/03/08) Earnings Call Transcript

| About: Borders Group, (BGPIQ)

Borders Group, Inc. (BGP)

F1Q08 Earnings Call

May 28, 2008 8:00 am ET


Ed Wilhelm - Chief Financial Officer

George Jones - President, Chief Executive Officer


Matthew Fassler - Goldman Sachs

David Schick - Stifel Nicolaus

Dave Weiner - Deutsche Bank

Charles Grom - J.P. Morgan


Good morning and welcome to the Borders Group first quarter 2008 financial results conference call. (Operator instructions) I would now like to turn the call over to Borders’ management, sir you may begin.

Ed Wilhelm

Good morning everyone, this is Ed Wilhelm and I’m here with George Jones. Thank you for joining us today for this discussion of our first quarter results. Before we begin this morning 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 and our most recently filed 10-K for information relating to forward-looking statements, including factors that could cause actual results and plans to differ. With that, I’ll turn it over to George now to begin our discussion of the quarter.

George Jones

Good morning everyone. Despite an overall challenging consumer environment that impacted sales performance, we were pleased with the quarter in general because Borders made major progress on several measures that are critical to reaching our financial goals and these include the first quarter improvement of $133 million in operating cash flow and the reduction of debt by approximately $131 million as announced in our press release yesterday.

Before we discuss the solid progress we are making on improving our balance sheet, I want to spend a few minutes talking about our first quarter sales performance. Comp store sales at our Borders domestic superstores decreased by 4.1%. This result was influenced by the dramatically negative 25.8% comp decrease in the music category.

Music trends being what they’ve been, we made the move to aggressively reduce inventory and space devoted to music in our stores and implementation of this strategy was largely responsible for the steep decline. Without the music comp, our total same store sales at Borders would have declined by only 1.7%.

The book category was relatively stable within the challenging consumer environment, it declined by only 1.2% and we saw particular strength in categories such as bargain books, children’s, café and our gifts and stationary business which was led by Paperchase.

At Walden Books, same store sales were nearly flat versus a year ago with a 0.8% decrease and our international same store sales increased by 3.1% with strong performance in our Australia stores in particular.

Even with the challenging consumer environment we were able to make impressive progress on improving our balance sheet. We improved cash flow by $133 million which is evidence that our inventory management initiative is working and making great strides. In fact, we decreased inventory by $188.4 million at cost versus the end of Q1 last year.

I’m also very pleased with the progress we made in reducing our debt. As all of you know and we’ve said many times, our debt level is too high and needs to come down appreciably. As I’ve said, we made strong progress in the first quarter reducing debt by about $131 million compared to a year ago.

I also want to point out the efforts we’ve been making with regard to expense management as a key component of improving our company’s profitability. We’ve worked with a third-party consulting firm to develop a plan to take more than $120 million in expenses from our business annually, giving Borders a new more effective base operating model going forward.

We expect to realize about half of these savings yet this fiscal year and the full amount in 2009. We will continue to be very prudent and conservative with expenses. The economic times really call for it.

The highly competitive and changing nature of our industry calls for our and our own individual company situation calls for a very conservative approach that better aligns our expense structure with all the marketplace factors and with what we need to do as a company to create greater value for our shareholders.

Clearly we still have work to do. We must keep our foot on the gas with respect to the expense reduction, inventory management, cash flow improvement and debt reduction programs that are working well and will now become the basis for our permanent operating model moving forward as we work hard to attain our overall long term financial goals.

We’ve also begun to get a better handle on the sales profit equation as we made some progress in terms of our merchandise gross margin and we continue to focus on improvement in this area. Before I turn it over to Ed I want to spend some time on the call today talking about two things, our concept stores and yesterday’s launch of our exciting new ecommerce site.

First, we were extremely pleased with the results of our concept stores. As of today we’ve opened nine of these concept stores across the country in markets as diverse as Las Vegas; Southbury, Connecticut; San Francisco; Denver and Indianapolis. We will open a total of 14 concept stores this year.

The concept store launch is one of the key planks of our strategic plan and these store openings were committed to this part of executing this plan. We’re really thrilled by the way customers are responding to these stores as they are performing extremely well and they are exceeding our sales expectations.

Now on yesterday’s exciting news about the launch of As you know, for the past seven years we’ve been teamed with for ecommerce and under that agreement Borders received a percentage of online sales. Now with the debut of our own site, sales and profits will all go to Borders and we expect the site to be at minimum break even in the first year and accretive beginning in 2009.

This site will be extremely meaningful to our business. I’m really proud of the new and its many innovative features. Our team, which was led expertly by our VP of E-business, Kevin Ertell, with much involvement from our IT team headed by Susan Harwood our CIO, did an outstanding job.

The site turned out great and we feel it is unique in the industry because it has qualities that bring a real bookstore experience to life online. As such, it’s perfectly in keeping with our overall mission to be a headquarters for knowledge and entertainment.

With this new site up and running, our Borders Rewards members can now earn and redeem program benefits online as well as in our stores which is important because we can now market it to these more than 26 million members and enhance the value of their membership and the program at the same time.

In the past, we essentially were turning over our online customers and their data to a competitor and now we can use that data to better market to our customers and serve them better as a result.

Over the next few months we’ll be rolling out the new to our superstores nationwide. The exiting Borders search computer stations that we already have in all of our store locations will be enhanced to include access to the new site and will give customers who are in our stores the opportunity to buy items online that may not be in stock.

We keep the sale instead of going to an online competitor. In addition, having the site in our stores, so much of the store experience on our site, we are creating a unique cross-channel shopping opportunity that we believe elevate the shopping experience overall to our customers.

I think you can tell I’m really excited about the new site and everyone here at Borders is proud of what’s been created. Certainly as customers experience it on a mass scale, we’ll learn more and tweak features over time and we’ll also evolve the site in the coming years to always be relevant and useful to our customers.

And with that, I’ll turn it over to Ed.

Ed Wilhelm

Thanks George. I want to provide a little more color, primarily on the key initiatives that are driving cash flow maximization and improving our company’s profitability. First, as stated in our March 20 press release and conference call, we have a clear focus on maximizing our cash flow and improving the profitability of our business.

I’m pleased to report that we made excellent progress on both fronts since then. The key drives of maximizing cash flow include reducing our working capital needs and improving our inventory productivity, reducing our capital spending and monetizing international assets through the strategic alternatives process.

Our results for the first quarter show tangible signs of the progress made on inventory productivity and on reducing capital spending. These signs include improvements realized in free cash flow and in debt reduction. Also, as mentioned in the release, the strategic alternatives process related to our international businesses is continuing.

As it relates to the inventory reduction, a big driver was the reduction in music inventory which declined 32% from last year. In addition, we reduced weeks of supply in book inventory and DVD inventory as well. As we’ve mentioned previously, a reorganization in our merchandising department has resulted in an improved focus with dedicated resources to drive this inventory productivity.

In addition, we continue to make enhancements to our merchandising systems and as a result improved functionality is being delivered to the merch organization to assist with inventory management.

Walden Bookstore closures also contributed to inventory reductions and cash flow improvements. There continues to be a lot of opportunity in this area and it will remain a key driver of cash flow for us going forward.

Second, related to capital spending, we said in March that we would critically review our capital spending plans and eliminate or defer spending that was not committed and would not provide quick payback. We have completed that process and expect to spend between $80-$85 million in capital expenditures this year, including approximately $10 million to support the international businesses.

And that compares to a total capital spend of $143 million in 2007. The cap ex reduction will be another key driver of cash flow improvement for us in 2008. In the current year capital plan of $80-$85 million, we will spend capital to open a total of 14 new domestic Borders superstores, including two relocations. All 14 are new concept stores and the capital for these openings comprise about one-third of the total planned cap ex spend for the year.

These were all previously committed locations and substantially all of these stores will open in the first half of the year. Next, I want to update you on the status of improving the profitability of our business. Again, back in March, we indicated that there was an opportunity to improve our profitability, even if the overall sales environment remained challenging, which of course it has.

Key drivers of profit improvement include expense reduction, gross margin improvement and lower DVD shrink and café waste. Regarding our expense reduction initiative, we have critically reviewed the cost structure of our entire business and developed a plan to reduce expenses on an annual basis by approximately $120 million.

Approximately half of that $120 million will be corporate office expense reductions and the other half will be reductions in store and distribution expenses. We have already begun to execute this plan in the stores and we are moving forward to execute the remainder of the plan very quickly.

As a result, we expect to realize approximately half of these savings of about $60 million in 2008 and expect to be operating at a level to realize $120 million in annualized expense savings at the beginning of fiscal 2009.

After reducing our expenses by $120 million, our corporate office, store and distribution cost structures will be more in line with where our business was several years ago, recognizing that today we have a much smaller Walden Bookstore base and a smaller international presence. I am confident these expense reduction savings will be realized.

Next, related to gross margin improvement, we did make some progress with our focus on driving profitable sales. Absent the negative impact of deleveraging occupancy costs, we would have had a slight improvement in our gross margins compared to last year. This was driven by a favorable sales mix as higher margin categories such as bargain books, café and gifts and stationary continue to show nice comp sales growth while music, a low margin category, continues to show a significant decline in comp sales.

In addition, promotional discounts at Borders in the first quarter were slightly below last year as we focused our promotions on driving profitable sales and continued to leverage the valuable customer data from the Borders rewards loyalty program to improve the effectiveness of our promotional discounts.

Finally, related to DVD shrink and café waste, given the control actions implemented late last year, our first cycle inventory showed some improvement over the prior year and we expect this favorable impact to increase for the remainder of the year as subsequent cycle inventories are taken and reported.

To conclude, we remain keenly focused on maximizing cash flow and improving the profitability of our business, even in the face of a weak consumer environment. In addition, we remain focused on working with our advisors to explore any and all alternatives that will enhance value for our shareholders.

That concludes our prepared remarks and at this time we’ll open it up for questions. Wendy will you take the first question please.

Question-and-Answer Session


(Operator instructions) Your first question comes from Matthew Fassler – Goldman Sachs.

Matthew Fassler - Goldman Sachs

As you think about your gross margin rate, you’re coming off a first quarter a year ago where your loyalty program led to some pressure on grosses and I guess you were essentially flat with merchandise margin rate.

What would it take to see the merchandise margins improve given that it seems like a lot of the erosion over the past couple of years was to some degree self inflicted and with that in mind, where would you assess promotional activity in the industry right now, both coming from you and also in the broader environment.

Ed Wilhelm

This has been a key focus that we’ve stated before is we’ve been pleased with our ability to drive sales, of course that’s been affected somewhat by the overall retail climate that you’ve seen with everyone in the first quarter. But we still, we feel like we’ve got a handle in terms of how to do that.

But we’ve been concerned in terms of the balance between that and profitability. We actually as we said in our comments earlier, we actually decreased our promotional activity and our discounting during the first quarter of this year and we’re trying to do it really more intelligently.

We’ve also talked previously about segmentation, utilizing our database. We’ve continued to run tests on this and this is one of the things that allowed us to be able to do this. And the more and more information we get on this the better we’ll get at it. And I think that’s really where we’re going to get a lot of our improvement.

It’s still been a very competitive atmosphere out there. However, I think if you noted in our major competitor’s comments last week, I think they made a comment regarding your intent to try to approach this more rationally. We’re glad to hear that and frankly that’s where we are right now as well, that’s where we were already as well.

From the standpoint that we think we’re trying to really use our promotional dollars effectively and nevertheless we’re still going to be promoting for our customers and try and drive our business, we just think we can do it a lot more intelligently going forward.

George Jones

One other thing would be in the area of improvement on our shrink and that’s been, Ed touched on that as well. We’re really pleased on this, we’ve talked a lot about that and that was a big hit for us last year, the shrink that we had in primarily really focused on DVD and our café wastage falls under the shrink numbers as well.

And we took initiatives on it the last half of the year. It took a while particularly on the DVD side to get these up and operated properly. But we are now seeing in the first cycle of inventories we had, we’re seeing evidence of that improvement and these were the stores that had the least amount of time for it to be effected and they were also, first cycle were also our most difficult quarters. But we still saw some improvement there and we’re feeling that we’ll get some benefit out of that going forward which will be positive.

Ed Wilhelm

I would just add that sales mix is going to continue to work in our favor. It has been working in our favor and will continue to work in our favor going forward on those behind margin categories continue to show and we expect them to continue to show nice comp sales growth. The cost reduction initiative that we’re undertaking does have a focus in our distribution centers, so reducing our distribution center costs will also help our gross margin.

And then again as we continue to improve the productivity of our inventory and improve the flow of our inventory, we’ll be able to lower our supply chain costs and again those costs are contained in the margin line as well. So a lot of opportunity to improve our gross margins going forward.

Matthew Fassler - Goldman Sachs

If you take a look at the way you got your inventories down, was there clearance activity that you had to launch in order to get there and would you assess the quality of your inventory today, particularly from an aged inventory perspective.

George Jones

The nature of our business versus what I’ve always been used to in the past in department stores and apparel stores etc, you’d have to reduce and clear a lot of inventory through mark downs. Not really the nature of the business here for us in almost all of our businesses because we have return privileges on the goods, the exception of that would maybe be our Paperchase business or we have a couple little ancillary areas like that.

But really what it did involve was us really doing a very careful edit of our assortments and reducing some titles that had been very slow sellers in our stores. We’re talking about a lot of titles here that were selling less than one copy for every 12-18 months.

And so we did this, I want to really emphasize, I think our group did a great job on this inventory reduction and continues to do it. But it’s been done very surgically. This is something we pulled together, a new merchandise, planning and allocation organization which we put in this first quarter led by [Ann Frasier] who came from outside of our company to head up this area.

And we really think we’ve made some nice progress there. We think we can get even better at this as we get more systems support behind it and as the organization kicks in even better. But we really think that this is something we’ve done, it’s actually going to help us by getting these inventories down because it’s going to give us more room to be able to [base out bip] in our stores which we’ve seen really working in our concept stores.

And I’ve said ever since I came here which is almost two years ago now, since the time I came here I think we had too much inventory in our stores, we needed to improve our turn. So we feel like we’re doing good things in that area.

Matthew Fassler - Goldman Sachs

You had a financing this quarter, can you just remind us where your key credit metrics stand, what kind of, any limitations or lines in the sand that you have and where do you stand also to those parameters?

Ed Wilhelm

We did complete the financing that we previously announced in March. That combined with our bank line and particularly with the progress that we made in the first quarter puts us in a very strong position. We’ve got sufficient liquidity to manage the business both short term and long term and we are in compliance with all of the covenants that we have.

Of course the one financial covenant contained in our revolver, we have disclosed that we’re not in compliance with. That ratio of earnings to fixed charged, but we have maintained, that doesn’t come into play as we’ve maintained a level of less than 90% of the availability of the borrowings.

George Jones

I really want to emphasize that again I think this is an area where we’ve really made big progress here. We’ve said on the last call, we said our focus for 2008 really needed to be focused on the fact that we have too much debt here, we need to get the debt levels down, we need to improve our cash flow.

And I think the fact that we did that with $130 million plus improvement in terms of lowering our debt and also $131 million improvement in our cash flow is I think evidence that these initiatives are really working.


Your next question comes from David Schick – Stifel Nicolaus.

David Schick - Stifel Nicolaus

Could you talk about, you gave some accretion dilution or lack thereof guidance for, just kind of walk us through what’s going on on the expense side, what’s the possibility that it becomes dilutive or is that out of, not a possibility at all for this year?

Ed Wilhelm

The way we built that, there are costs required to support it but we did not build a fulfillment center, we’ve outsourced a lot of the, all the fulfillment to third-parties and a lot of the other management to third-parties. So it’s a low cost dot-com model and we’re highly confident in our ability to break even this year, even with conservative sales and also highly confident in our ability to be profitable with dot-com in 2009.

George Jones

I really want to emphasize, we’ve approached this with very conservative estimates and projections for our dot-com business going forward and this is an area we feel like we’re really proud of the site, it’s up and running now, we have launched it and we’re really, we encourage everyone to go take a look at that and buy something.

And we really think we’ve got a good site here and we think if anything we’ve got some nice upside there. But we’re approaching it with very conservative projections. We’ll look at a break even this year and accretive next year.

David Schick - Stifel Nicolaus

How about open rates on your emails to reward members, can you talk about what’s going on there?

George Jones

They’re really holding up about the same as they were, they’re generally running in somewhere in the mid 20’s, percentage wise, and this is about where they’ve been. And that’s really good given the program continues to grow and we’re over 26 million members now and, maybe 27 now, so growing about 140,000 a week on this and so it continues to grow.

You know you’d think basically the bigger the number gets, you would think it would be a challenge to keep up the open rates where they’ve been, but they’re still holding up really well. We think frankly I mean one of the real benefits by the way we’re going to get out of this now is the is you think about what we’re sending out and I think we’re getting more stickiness with this because the media we’re creating and a lot of things, it’s the content we’ve got on there too.

But one of the big things now is when we send out our weekly short list and these customers open it up, so you get literally millions of customers opening this up, now when they look at this and they see it, they’ll be able to click and actually buy the merchandise by utilizing our

We haven’t had that previously and I think that’s one more way you’ll end up building our dot-com business. We’re feeling, the rewards program still continues to be as a marketing tool and the short list which we’re using continues to be just extremely effective for us and we think this is a real competitive advantage for us.

David Schick - Stifel Nicolaus

Could you talk about ticket versus traffic in the stores?

Ed Wilhelm

If you look at the 4.1% decrease that we’ve had in the first quarter, transaction count was down about 2.6 and the average ticket was down about 1.5 on it and we were down 0.8 in specialty stores and it was pretty well split between transaction and ticket.

David Schick - Stifel Nicolaus

Any issues internally at Starbucks and what they’re doing affecting their ability, I know you’d been working on some menu changes and tweaking and continuing to improve the café, are any of the issues that they’re dealing with internally affecting the pace at which you can improve the sales?

George Jones

And obviously I’ve been keeping up with some of the things happening there and as you know what you’re referring to is Seattle’s Best our partner for our cafes is owned by Starbucks.

It is sort of an independent division within there, but nevertheless I think a lot of the things that Howard Schultz seems to be focusing on and the direction that they take in Starbucks weren’t necessarily taken at Seattle’s Best. And frankly we haven’t seen a lot of changes. They continue to be an excellent partner for us, we really enjoy working with them.


Your next question comes from Dave Weiner – Deutsche Bank.

Dave Weiner - Deutsche Bank

Follow up on, Ed what are you using to measure the profitability of that, when you say break even this year, using EBITDA or EBIT or?

Ed Wilhelm

We’re using EBIT. And the standalone costs, so just to be clear, it’s the standalone cost of the dot-com entity itself. It doesn’t include sales that would be processed through a Borders store.

So for example, if someone was standing in a Borders store and wanted to special order something and they hopped on one of our customer information kiosks and ordered it through that kiosk, that would actually be a sale that would be fulfilled with dot-com, that would be reported as a store sale.

George Jones

That would benefit the stores so we’re not even including that in.

Ed Wilhelm

So the sales we’d be including would be sales that would be from a consumer’s home placed through and then all of the costs to support dot-com itself. And again as we’ve mentioned earlier, many of the costs that we have are variable costs and we have a lower fixed cost model with this dot-com investment which again makes it easier for us to get to break even on relatively conservative sales thresholds.

Dave Weiner - Deutsche Bank

Will this be a separate reporting line item when you, future press releases.

Ed Wilhelm

We’re going to decide how we go forward with the reporting in the second quarter but I think where we’ll end up is we’ll report sales separately and include the rest of the information in the Borders segment. But that hasn’t been finally decided yet, we’re going to do some more thinking about that and report in the second quarter when we have a quarter to report.

Dave Weiner - Deutsche Bank

Just to be clear, any sales related to the website aren’t going to be included in the comp.

Ed Wilhelm

That’s correct.

Dave Weiner - Deutsche Bank

On the shrink, can you just talk a little bit about what are the issues, I know you’ve talked about it in the past but just as a refresher, what are the issues there? What’s driving the shrink rate, have you actually given that shrink rate as a percentage of sales?

Ed Wilhelm

We haven’t given the shrink rate but there were two components that drove high shrink for us last year, DVD and café. And the DVD category was driven primarily by box-set DVD and we just got a little relaxed on our protection of box-set DVDs and starting late last year we got more aggressive with protecting those DVD box-sets whether it be locking them up in glass cases or protecting them with protection, a device that’s called a spider-wrap.

So we took those actions last year and again as I mentioned in my prepared remarks, the first cycle inventory that we took this year with our first group of stores showed improvement in DVD shrink and I fully expect as the rest of the year moves on that that improvement is just going to get bigger and bigger because more of the sales that we’d be measuring the shrink on would be captured after our actions were taken, if that makes sense.

Dave Weiner - Deutsche Bank

Just practically speaking, for all the items, the categories that you think are particularly affected, have you already gone ahead and protected those as of today?

George Jones

Absolutely. What happened, this is I guess about a year before last, sort of before I arrived, the company made a decision to unlock, get rid of the locked cases and unlock the higher priced DVDs, the box-sets, and what happened is it certainly made it more convenient for customers and it had some positive effect on sales. It also made it easier for thieves.

And we saw this last when we started doing the inventories, it showed up in the inventories that we were really getting hit on this and that’s when we said hey wow we’ve got a problem here. And then that’s when we realized that they made that change before I got here and we started taking steps to put this back in.

I will tell you the other issue was the food waste which went in there and we’ve talked about this some before. The DVD thing, it was something after we noticed it we couldn’t fix it immediately because they’d actually ripped out the cases and taken out the cases where they used to lock them up.

So we had to get some different methods in terms of putting cases back in or put these spider things around them, the protection devices etc. So it took us a little while to be able to do that, but we moved pretty urgently and by the time we hit fourth quarter last year we had this pretty well in place. So we should start seeing some benefit now.

Ed Wilhelm

And then the second component was the café waste and quite simply put, we were buying more product to support the Seattle’s Best cafes than sales would support. At the end of the day we were throwing out more than we should so again late last year we took steps to adjust the buy side of the café and as a result have seen again as I mentioned earlier less waste coming through our café inventories.

George Jones

It was literally, the standards they had were that if you were a café doing X amount of dollars, you were putting out the same amount of food and product making the same amount of coffee as a location that was doing twice that volume.

Dave Weiner - Deutsche Bank

Music as a percentage of sales, can you give us?

Ed Wilhelm

About 7.5%.

George Jones

It finished at a little over 9% last year and with the way it’s running right now that’s at about 7.5% and what we’ve done, we’ve made pretty dramatic steps there, we took our music inventories down by about 32%, sales were down about 25% but we also shrank the floor space by about that much at least.

And you know it varies by the amount by stores but what we’re really doing is really sort of catching up in terms of getting our floor space and inventories aligned more with our business where it’s really been running.

Dave Weiner - Deutsche Bank

And as a target percentage for music, what would that be?

George Jones

We still feel that music is still an important ingredient for our customers, we know they enjoy it etc, but we’re going to be realistic about it. I think it would be foolish to sit here and say we’re expecting a rebound in the CD business. But however, I will tell you that we’re really pleased with the initiatives we’ve taken in our concept stores where we’ve put in the downloading and mix and burn.

And again we only have a small number of stores that do this, but we’re seeing that we’re able to shrink the music space and CD inventory substantially and still do more business because it’s been really well received by our customers. And we think when you really look at it that’s a way of really expanding your music offering but without tying up the floor space and inventory. So we really like that.

We’re looking at any number of things which we’re learning from these concept stores and the real benefit from these concept stores will not just be opening a lot of new stores, it’ll be taking these things and retrofitting them back to our existing stores. And that’s what our plan is to do over the next several two or three years.


Your last question comes from Charles Grom – J.P. Morgan.

Charles Grom - J.P. Morgan

I was wondering if you could comment on how the quarter comp trended within each month and just with regards to your commentary and the press release on May, if you could provide some framework around that.

George Jones

Without breaking out specifically each month, I’ll tell you this, we said fourth quarter, we were started up fourth quarter really strong comp sales and just like everybody else, they started really hitting the wall, like turning off like a faucet in early or mid December. And that’s really what I’ve talked to other retail CEOs and I think that happened to just about everyone.

And so they really flattened out there too. Our comps really all through first quarter were, it was a difficult period all the way through. Actually April was the toughest of the months within the quarter. And we’ve heard that from some other retailers as well, ones that commented about it.

April was the toughest month, however we’re really pleased that so far as we’ve hit May, we’ve seen some rebound in our sales, we’ve seen some improvement. But we’re still, however, projecting the sales very conservatively going forward. We also know we’re up against Harry Potter for this quarter, surely affects book rate dealing. We’ve allowed for all of that.

We have very conservative projections going forward and we’re trying to measure inventories well, controlling expenses, we’re trying to really get more intelligent on our promotional activity and we’re prepared to still be able to deliver the results we need even in a tough environment. If sales happen to get better, that’ll be great. But we’re going to plan conservatively and take it from there.

Charles Grom - J.P. Morgan

I know within the new concept stores you’re testing the face out of the books, how many stores are you rolling that out to within the whole entire chain and did that have any impact on the reduced inventory levels in the quarter?

George Jones

We’re rolling it out everywhere. This is something again I believe in just logically since I came to the company. And you’ve got to be careful because I wasn’t a book retailer but I’ve seen it work in every other business I’ve been in and it makes sense will all that goes into a book in terms of creating a cover and marketing etc, why would you be selling so many spines instead of facing them out where the customer can see them.

So I believed in this all along, we just couldn’t do it, we had too much inventory in place. The concept stores allowed us to really take this and start from scratch and really do this the way we wanted to do it by editing the inventory etc. And we’ve seen this consistently working at our concept stores.

We also tested this in a number of other stores as well where we did this type of thing. So we’re moving forward with confidence on this which is the right thing to do and this is a quarter where we’ve made a lot of steps to get ourselves into a position where we can do more face outs in all of our stores.

So the answer to that question is we’re rolling out all of our superstores and even to some extent at our specialty stores as well. We just feel it’s the right thing to do for our business and it’s interesting, some of the interesting things we’re seeing from our concept stores in terms of some of the research we’ve done and the studies of that too is the customers give us credit for having a broader assortment than we had before.

Charles Grom - J.P. Morgan

Cost savings at the store level, can you talk to where exactly you’re going to be doing that to try to obviously avoid any impact on sales, just exactly where you’re going to be cutting costs?

Ed Wilhelm

They’re across the board. So they’re payroll and they’re non-payroll. So some of the energy utility areas, supply areas, it’s really across the board and obviously we’re doing it with an eye on sales and don’t want to lose sales as we’re doing it but there are opportunities and we’re taking advantage of those opportunities and reducing the costs.

George Jones

I want to say too that these cost cuts which are pretty substantial, we started on this effort back last year. We had some third-party help really coming in last year to look at these. We’ve taken our time on doing this and one of the reasons we didn’t do it more quickly is because we’ve been very diligent, this has been done very surgically in terms of where we’re going to make sure we can do this without impacting negatively our sales.

I’d also tell you that the cost cuts and what we’re doing, while it is both payroll and non-payroll involved here, we’ve been very careful that we don’t want to impact the service levels in our stores. We’ve done this again, very, very carefully. We’ve had everyone, all of our senior team and all of our officers have been involved in this and it’s been a very surgical approach to doing this.

We feel really good, we feel real confident we’re going to get this $120 million plus savings out, about half that this year and we’ll get the full $120 plus out next year. And we think we can do it without impacting our sales.

Ed Wilhelm

And we’ve got metrics that we continue to monitor and actually our customer service scores have improved in the first quarter from previous quarters.

Charles Grom - J.P. Morgan

On the internet business, can you give us some type of framework? I mean obviously you know the history of what you gave back to Amazon over the past seven years, what you think that could be accretive to the total sales number?

Ed Wilhelm

We haven’t gotten specific on any kind of sales guidance at all. The site just launched yesterday and again we’ve got our internal projections and we believe that our internal projections are conservative on the sales side.

We do know the business that we were doing with Amazon so that gives us a pretty good base to project from and based on that conservative sales projection, again we believe we’re highly confident we can break even this year and be profitable next year.


I’m showing no further questions, I’d like to turn the call back over to your speakers for any closing comments.

George Jones

We want to thank you for talking with us today. Our second quarter news release is scheduled for August 26 with a conference call to follow at 8.00 am on August 27. And thanks everyone.

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