Borders: Interview with CEO George Jones

| About: Borders Group, (BGPIQ)

Here is an interview with Borders (BGP) CEO George Jones.

In full disclosure I am a shareholder. I debated a long time before buying shares, and one of the reasons I did was the question of whether or not the analysts were right about the book business in itself, not specific to you but just in general. With retailers like Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) now in the mix is the model (the stand alone bookstore), maybe not dying, but stagnant? Can you address that and tell me how people are wrong about it and how you see the model?

I have been at Borders for about two years now--since July 2006--and as soon as I arrived, people questioned whether I realized the challenge of the business and what I was getting into. Of course, I had done my due diligence and knew coming in that our business is really several businesses--books, music, movies, cafes, gifts and stationery, etc., and I understood the complexities of each and the competitive and environmental challenges of each.

But what I found most compelling was the Borders brand and the people. Borders is a much-loved, highly regarded brand with some of the most intelligent and engaged employees I’ve worked with in the retail industry. I felt then and still feel now, that we are a terrific company with great opportunities. It’s not a secret that the music business is extremely challenged industry-wide and it has clearly affected Borders. What we’ve done about it is to reduce space in our stores devoted to music in favor of other categories that have higher margins and are growing—categories such as Children’s and Bargain books, for example.

When it comes to the book business, it is certainly not a dying business. I personally believe that people will always want books to be informed and entertained. The format their books take may evolve over time, but books will always be a part of people's lives. If you take our second quarter 2008 results for example, our book business (once the Harry Potter comparisons of a year ago are factored out) was down slightly overall—and that’s in a really tough economic environment. There are some categories—such as Children’s and Bargain—that continue to grow and thrive even in the current challenged economic environment.

To give one example of the vitality of the book business, take Stephenie Meyer. She is on fire! We recently (in August) had the big release and midnight parties in our stores for her book “Breaking Dawn.” We sold over 250,000 copies in day one of that title alone and we had 225,000 excited fans show up at our stores nationwide for the midnight book release parties. That’s a sign of the great vitality in our business when you can marry a book release with an experience and we do that at Borders extremely well.

As I said, our bargain book business is also doing well. You have a lot of customers in today’s economy looking for value and we’ve certainly played that up and turned this into a very good business for Borders. In addition, I should mention the strength we have in the category of Graphic Novels, which has always been good for us but has become even better with the success of superhero films like “The Dark Night” Batman film and “Iron Man,” as well as growth in Manga. So, we have strength in key categories that are quite healthy and growing really well.

How is technology playing a role?

We are certainly embracing technology and going forward with it in our stores and online. Don’t get me wrong…I do not think that technology and self-service in our stores will even vaguely replace the fact that you can come into our stores and there is someone who greets you and is knowledgeable about books. That is and will always be a huge part of our business.

Yet, we are doing more with technology to stay in-step with how our customers use it today. For example, we will be rolling out kiosks in our stores that feature our new site. Not only will customers be able to search on it for titles, but they will be able to order items online as well as find a wealth of information right there in the store including book reviews, staff and customer recommendations, event information, interviews with authors, and things like that. So technology certainly does play a role, but we still obviously put great importance on the role that our book sellers have in exceeding customer expectations and we think, frankly, that's an advantage for us, as we have really knowledgeable people working in our stores.

So what about the Kindle. I personally can't imagine taking an electronic book to a beach during a summer vacation. Do you see that as being anything more than a little niche kind of product or do you think it will grow and be significant in the book industry?

I think it will grow but the vast majority of customers in the foreseeable future will continue to prefer a good, old-fashioned printed and bound book. That said, we have our own partnership with Sony (NYSE:SNE) and the Sony Reader Digital Book. We got into this alliance soon after I arrived here in 2006. Borders was the first and only retailer outside of SonyStyle stores to sell the Reader for a number of months and even though the retail network has widened since then, our affiliation with Sony has continued to expand…we have a co-branded e-book store with Sony at that keeps expanding and offers downloads of e-books for the Reader. We think we are great partners together and we are big supporters of Sony. Does this represent a significant portion of business right now? No. But we're going to be in it because it’s all about embracing technology and having what customers want—whether it be a traditional book or an e-book and the device to read it on., when you guys rolled it out, I want to say June, you had said you had expected it to be profitable this year, are you still on track for that?

We said in our second quarter release that we are on track for the site to break even in its first year. We feel good about it. We launched the site in May of this year and it went through a pilot phase where we put it out there and people starting using it, we worked out some of the expected bugs and glitches and then in July we began marketing the site.

One of the big reasons we wanted to get this site up and running is that we have an incredibly successful Borders Rewards loyalty program that now has approximately 29 million members and is still growing at about 130,000 new members each week! These are our best customers who spend more on average per visit.

In the past, under our former agreement to have the site operated by, these customers could not use the Rewards program when they shopped online, which was not acceptable. Wanting to serve these customers was part of the overall vision we had in mind as we were building this site; to get the e-commerce back in our hands and under our control so we can maximize it as a powerful tool to serve customers and sell products. We send weekly e-mails to these 29 million Borders Rewards members called the Borders “Shortlist.” In the past, when the Shortlist talked about a particular title, the customer had to make note of it and go to our stores to get it. Now, with our own web site, we have a buy button right there within the Shortlist that takes interested customers right to so they can buy it instantly.

There are many advantages to and customers tell us they love it. It’s very early in the site’s life, as we just started to market it near the end of our second quarter, so the sales results we reported reflect that. We feel really good about the site and are on-track.

You said in the past that those Rewards members, the 29 million people, they’re your most valued people, can you quantify the value of a member of that?

We haven’t released any figures on the spending patterns of our Borders Rewards members, but I can say that Borders Rewards customers account for the majority of our sales.

Now, Barnes and Nobles (NYSE:BKS) averages about a $100 million a quarter in sales, based on your first quarter (with the site in operation) you’re not tracking all that far off that, obviously your expectations would be what for

I have to be clear that we have not issued any sales expectations for Our second quarter results reflect only a small period of time when the site was actually marketed, so it is still very early and too early to draw conclusions. The only thing we’ve officially said is that we expect the site to be break-even in its first year and then make a profit after that. It’s a good opportunity for us.

[Regarding] your $120 million dollars in cost savings annually, what percentage of that would you quantify as more permanent savings? I know some of that is in labor and stuff like that and obviously when the economy turns itself it starts to pick up some of those savings will be lost, but how much of that savings is more of a permanent savings?

We’ve stated that we will trim $120 million in annual expenses as part of a new base operating model for our company, realizing $60 million of that yet this year. It’s a permanent savings—100% of it.


Basically, what we have taken out of our business in terms of expenses, we plan on keeping out.

The "Strategic Review" process. Is there a point in which going forward in which your going to say "you know what, enough, we don't need to sell for shareholders to realize value we can do this on our own"? This up in the air kind of thing, people don't have a lot of confidence when they don't know what's going on. They think you're selling because things are bad.

I cannot make any comment about the strategic review process.

Would it be safe to say Borders is not on "Strategic Review" because it doubts its viability?

Again, I cannot make any comment on the process, but when we announced it we said that we were undergoing this process to assess our long-range options.

Last earnings call you guys were asked to give guidance to the future and obviously didn't want to do it with the economy and the way things are kind of just hanging out there now, but I personally detected sort of a "we can't give guidance but you will be surprised" kind of thing to the positive side for shareholders.

We actually do not provide guidance. We ceased that practice in March 2007 when we unveiled our strategic plan to turnaround the company…we said that we were in a turnaround situation and were not going to give guidance going forward. We haven’t and won’t be giving guidance. I can tell you we are real pleased with this progress we are making on improving our balance sheet, controlling expenses and managing inventory in spite of the fact that it's a really tough environment out there and it continues to be a tough environment. We are focused on running our business sensibly and driving the best results we can in this environment. I believe we can weather the storm and eventually the air will clear and we will be ready to forge forward.

The new concept store you have rolled out, every time I hear someone in management talk about them, I get the "we couldn't be happier" vibe from you guys, first of all is that true? And second, do you intend to accelerate the openings of those?

First off, we couldn't be happier. We are really thrilled with the concept stores. We have 13 of them open now and they are all over the country. We opened the first one in Ann Arbor because we wanted to run it right here in our corporate home base where we could use it as a lab of sorts. We have since opened 12 more in addition to that first store in Ann Arbor and their locations range from southern California to Connecticut, Massachusetts to Florida to Indiana. These stores are doing well. We will be opening up our 14th store in New Orleans in November and we think it's an exceptional location there.

Our strategy going forward is to pull back in terms of our new store openings, to allow us to take what we learned from these concept stores and spread it to our existing stores, so that's really how we are going to get the benefit of the concept stores. Simply opening 14 concept stores and having them do well really doesn’t move the needle in a company as big as ours, we have over 520 superstores. The real benefit of it is that we take those things we have learned and are able to put them back into our existing stores so we can leverage the learning and really build something with an impact.

Now, are all these new stores or are some refurbs?

All of the concept stores are new stores, not remodels.

So you don't have before and after numbers?

No, but I can say that the concept stores in general out-perform new stores of the past.


We have not disclosed that, but their productivity is improved versus our previous openings in previous years. We are really pleased.

If you had to look at Borders right now, what would be your biggest area you would have to say "we have to run at this as fast as we can" because this is a huge opportunity for to capture?

Overall, it is our mission to be a headquarters for knowledge and entertainment. It really goes away from the way Borders looked at its business previously, as simply sellers of books, music, movies but also with a cafe and stationery. We are trying to build a much better business by becoming a true headquarters for knowledge, information, and entertainment. So, when you look at it that way, there are a lot of things you can do, and one of them is incorporating technology and the internet.

Pershing and Paperchase, say what you’re allowed to say. The whole reason for doing a loan with Pershing was potential liquidity issues. Now people are concerned that if that [loan] has to be paid back those issues reappear. Would you be able to say that those issues, barring any significant economic collapse, should be put to rest by people thinking about investing?

All I can do is point you to our second quarter results where we showed that we are significantly strengthening our balance sheet by paying our debt down, improving inventory productivity and we have dramatically improved our cash flow. We are doing the right things to position our business for the long term.

So paying back the Pershing loan will have very little impact on the equity going forward.

Our plans factor this in.

Personally, I can't stand it when people give guidance, are you planning on going back there, is there something that makes your life easier with analysts?

Not planning on it in the foreseeable future. I will tell you that retailers are going more and more away from giving guidance, so I can't imagine why we would want to go back to doing it.

It is hard to capture tone in a written article but I do have to say that Mr. Jones is very confident about Borders and its prospects. Of course there are specifics that cannot be said, but the tone at which questions are answered at times can speak volumes more than the words. This is one of those times. While not stated, one cannot escape the feeling that Mr. Jones feels an urge to sell the chain unless he gets the price he wants.

Let's not forget the job currently being done and a retail environment that is really hurting others. Next earning are due Nov. 25th. It will be a good day for shareholders.

Disclosure: Long BGP