Barnes & Noble's Earnings Call from a Borders Investor's Perspective

Includes: BGPIQ, BKS
by: Todd Sullivan

Here is what a Borders (BGP) investor cares about in Thursday's Barnes and Noble (NYSE:BKS) earnings call.

Steve Riggio CEO: "Good morning. While our sales were less than we expected, it still remains that the book business is a relatively stable one which we’ve said time and again. We believe our comp sales, while slightly negative, held up well compared to most of the retail sector.."

If the book business is "stable". Then it logically follows that to increase share and earnings, physical growth is necessary. What better way to grow than to eliminate 12% of the market via an acquisition?

Charles Grom – J.P. Morgan: "And then just in terms of the speculation out there about Borders, I was wondering if you guys wanted to go on record and make a comment just to kind of clear the air, I’m sure it’s on everybody’s mind at this point."

Steve Riggio: "We’ve put together a team of senior management people and financial advisors to study the feasibility of a transaction with Borders. We’ll provide no further comments about any discussions we may or may not have."

Regarding "Members":
Steve Riggio: "We don’t think it’s necessary. We think it’s more profitable to build business with a strong member base of highly motivated individuals that pay our annual membership fee and we continue to test and we’re learning quite a bit. Understand we have about seven years of history in this mailing hundreds of millions of emails and coupons of all different types."

He continued: "So we have tremendously sophisticated analysis about what works, what doesn’t, what drives traffic profitably, what drives traffic unprofitably. So it’s not something that we will completely back away from testing because it is a good thing to do. But we believe that the path forward is to focus on the everyday discount that the card offers and it makes a lot of sense to us, that’s what the numbers are saying"

Remember, Borders has over 1.75 million members in its "Borders Rewards" program. There is tremendous value to this for BKS. Aside from eliminating the only real competitor in the "big box" bookseller, transferring almost 2 million customers to your most fastest growing entity, "membership", is paramount.

Sales at Barnes & were $99.6 million for the quarter, a 7.2% comparable sales increase and gross margins there improved 80 basis points this quarter. I have to believe the average online customer spends more than $45 dollars a year. My guess would be at least twice that, but let's just go with that. I also could not find how many BKS online "members" there are, if anyone knows, please let me know. That being said, if that is all it spends, BKS would double its online presence immediately.

Let's then add the $25 annual fee
for fun and now we have another $43.5 million flowing to BKS.

The whole of Borders right now is only valued at $403 million, yet its upcoming site alone must have a value of 30% of that.

Riggio may want to do this now if for no other reason, a revitalized Borders will add severe headwinds to his business. Based on results from its new concept to date, that is happening...

Disclosure: Long BGP

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