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Tuesday, January 26, 1999

Borders Group Inc.
(Nasdaq: BGP)
Phone: 313-913-1100
Website: www.borders.com
Price (1/25/99): $18 13/16


Imagine a life without Borders. To some shareholders that might amount to wishful thinking nowadays since the stock in the second-largest bookseller has fallen faster than a dated bestseller.

The shares peaked in July, just as investor enthusiasm began to wane over the company's online website launched just two months earlier. While a latecomer to the e-commerce party, the company had consistently been a fiscal performer -- meeting or beating earnings estimates every single quarter since going public in 1995.

While that will all change with the January quarter, the stock began to weaken in the second half of last year when the old adage of two being company but three being a crowd began to water down hopes of a successful run for the borders.com online business.


Borders recently opened its 250th namesake superstore. Beyond that, the Michigan-based company also owns about 900 mall-based bookstores under the Waldenbooks and Brentanos monikers. Borders has also crossed international zones -- having opened a few international locations. While the overseas push once primarily consisted of two dozen United Kingdom units under the Books etc. brand, huge 40,000 square foot Borders behemoths have begun to spring to life in London and Glasgow.

Borders.com made its eagerly anticipated debut last year and lists over 650,000 titles with 10 million books, videos, and music CDs in stock.


Income Statement
12-month sales: $2508.3 million
12-month income: $84.3 million
12-month EPS: $1.03
Profit Margin: 3.4%
Market Cap: $1557.7 million

Balance Sheet*
Cash: $40.3 million
Current Assets: $1239.8 million
Current Liabilities: $1144.9 million
Long-term Debt: $59.9 million
(*As of Oct. 25, 1998)

Price-to-earnings: 18.3
Price-to-sales: 0.6


Arriving fashionably late to the e-tail ball has proven costly for Borders. By the time it finally showed up after more than a year of announcing such intentions, the playing field had already been carved up by Amazon.com (Nasdaq: AMZN) and Barnes & Noble's (Nasdaq: BKS) online store. Amazon and barnesandnoble.com had the exclusive advertising deals lined up with prime portal real estate, leaving Borders to promote its site through lesser players like Infoseek (Nasdaq: SEEK) and CNET (Nasdaq: CNET).

Life on the brick and mortar front has also lost some of its luster. Same-store sales for the critical holiday season at the Borders superstores are expected to rise less than 3%. That is a far cry from the 11% and 8% comp gains the company had over the 1996 and 1997 holiday seasons respectively.

And the superstores are still the expansion gem of the company. Same-store sales at the mall-based units have been flat to lower over the past three years. Through the first nine months of fiscal 1998 the company shuttered 37 Waldenbooks while only opening 10 new ones.

While superstore growth has more than offset the mall malaise, it hasn't been enough to pacify investors. Wall Street had been promised an online site for a couple of years and the company was slow to deliver.


The January pre-announcement was unsettling on the surface. Fiscal year estimates of $1.22 a share were four to eight pennies too high. Snowstorms and an unusual number of gift certificate purchases (which do not get billed as revenues until redeemed) were named as the culprits for the weak showing during the company's seasonally strongest quarter.

The irony is that, for a company so many suspect is behind the times, it is innovation that played a major role in the quarter's demise. If it wasn't for borders.com, the company would have reported earnings $0.12 to $0.14 a share higher. Analysts had already accounted for that, but what they didn't expect was a 40% surge in gift certificate sales, fueled in large part by the company's new electronic gift cards.

Since fewer than a third of the gift purchases are expected to be redeemed by the end of the quarter, an optimist apparently has some built-in sales to look forward to for the April quarter. That's right, the gloom here appears overstated. While the quarterly streak of meeting estimates hit a grinding halt at 14, the prospects for Borders appear brighter.

Sure, Amazon.com and barnesandnoble.com had first dibs on the best websites, but what borders.com lacks in traffic it is making up in style. Money.com and Gomez Advisors have praised the online store in recent months. Why not? The online storefront is intuitive and ultimately addictive with unique content and its community-inspired NetCafe, where authors chat with online fans.

As a company that is financially able to take a hit in e-tail thanks to its superstore cash cows, it seems to be one of the more sober ways to play the popularity of Internet commerce and community. With a seasoned CEO in Philip Pfeffer taking over this past November (having worked previously for Random House and Ingram Distribution Group), maybe imagining a world with Borders might be the ticket to a happy ending.

-Rick Aristotle Munarriz

Would you work for a bunch of Fools?

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