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Borders Group: A Classic Value Trap?

|Includes: AMZN, Borders Group, Inc. (BGPIQ), BKS, WMT

Today, Borders Group Inc. (BGP) reported sales results for the 11 week holiday period ended January 16, 2010.  The company reported total sales of $846.8 million, a 13.7% decrease from last year’s holiday period.  The results proved disappointing considering last year’s holiday season fell right in the midst of one of the worst economic recessions.  All of Borders’ individual business segments reported declines except the international segment which reported a 8.7% sales increase to 44.4 million.  Here is a statement from CEO Ron Marshall:

 “We are disappointed with holiday results and must intensify our focus on creating and delivering a shopping experience that drives profitable sales.  Given the sales challenge, we have continued to manage cash flow and have taken several important steps in line with our strategic priorities, including moving away from underperforming, low margin categories such as music and video in favor of better performing categories such as children’s. The decision to exit multimedia is right long-term, but impacted comp store sales by 3.7%.  In addition, as previously announced, we are right-sizing the mall business with the closure of 182 Waldenbooks Specialty Retail stores. We have continued to expand our Borders Rewards loyalty program and recently announced digital book partnerships with Kobo and Spring Design that position Borders to be a high quality content provider of eBooks. We will continue to focus on reducing expenses and improving working capital to drive improved cash flow and debt reduction as we address the clear priority to drive profitable sales.”

 It doesn’t take a rocket scientist to realize the challenges Borders Group (BGP) is facing.  In the world of book retailers, the classic brick and mortar business is broken and has moved on to online ordering and digital media (e-books).  With competitors such as Amazon (NASDAQ:AMZN), Barnes & Noble (NYSE:BKS), and new to the game Wal-Mart (NYSE:WMT) who announced earlier this year that it too would expand its efforts in the book business, Borders (BGP) clearly has a tough road ahead.

Financially the company is struggling, posting operating losses in 3 of the last 4 quarters and missing earnings expectations in both of the last 2 quarters.  Since shaking up management at the beginning of 2009, the company has been focused on slashing costs, paying down debt, closing unprofitable stores, and expanding its online efforts as well as e-book delivery for tablet/mobile readers.  New CEO Ron Marshall was previously a partner for Wldridge Capital Management, a private equity firm in which he founded.  Another management change was Richard (Mick) McGuire, who was appointed to Non-Executive Chairman of the Board.  Interestingly enough, prior to joining Borders Group, Mick McGuire was a partner at Pershing Square Capital Management; a New York based activist hedge fund who also happens to be Borders Group’s largest shareholder owning roughly 10.6 million shares at an average cost of about $6.00 per share.  Both changes in management seem positive for Borders Group (BGP), as their combined experience gives the company a slight edge to helping it turn around and catch up to a fast moving retail market.  Plus, as a shareholder, it doesn’t hurt to have a activist hedge fund on your side taking care of most of the dirty work in the turnaround process.

Here at, we believe shares of Borders Group (BGP) are slightly overvalued at its current price of $1.36.  Considering the company’s financial situation, and the current economic environment, we believe that a fair price to pay per share of Borders Group (BGP) is in the range of $0.90 – $1.15 or 1-1.5x cash on hand.  The company has a strong brand and loyal customer base, the main focus going forward is management’s ability to execute smoother low cost operations.  If they are able to attain low cost operations and capture new business through eCommerce, there should be some serious upside potential.

Disclosure: No Positions