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Borders Peddles Pulp Fiction

By Alyce Lomax | More Articles
August 27, 2008 | Comments (2)

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Borders' (NYSE: BGP  ) latest quarter may look much improved on the surface, but the numbers -- and investors' response to them -- remind me of the genre known as "pulp fiction." It may be exciting and titillating, but it's rarely good. After finishing the company's latest quarterly chapter, investors bid shares up 20%. For their sake, I hope this story turns out better than I think it will.

In fairness, shareholders have a right to be relieved that Borders reported a much less harrowing loss than observers expected. The bookseller's second-quarter net loss came in at $11.3 million, or $0.19 per share, a dime better than analysts' grim projections.

It's also good to hear that Borders has pared back its debt burden. Not long ago, the company spun a scary story about a potential liquidity crunch, and had to obtain financing from major shareholder Pershing Square Capital Management.

Still, like Gap's (NYSE: GPS  ) results last week, Borders is eking out these improvements by cutting costs and reducing inventory, not by drumming up or bolstering its core business. Short-term traders may be perfectly fine with that, but I see no reason for investors to cheer the company's long-term outlook. Its overall sales dropped 6.9% in the quarter, while same-store sales decreased 8.9%.

The lousy economy is already driving more and more people to discounters like Target (NYSE: TGT  ) , Wal-Mart (NYSE: WMT  ) , and Costco (Nasdaq: COST  ) to pick up their bestsellers. But even in a more favorable climate, bricks-and-mortar book retailers like Borders, Barnes & Noble (NYSE: BKS  ) , and Books-A-Million (Nasdaq: BAMM  ) don't impress me. The future of Amazon.com's (Nasdaq: AMZN  ) Kindle may be in dispute, but I firmly believe that its digital delivery model, and Amazon's continued innovations elsewhere, bode nothing good for the company's more traditional rivals.

For all of today's euphoria, this still wasn't a profitable quarter for Borders -- just more of the same. If anything, I think today's stock surge might let some investors close the book on Borders while they can. Anyone else determined to hang on to this story should look for it in the "horror" section.

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Borders Group and Wal-Mart Stores are Motley Fool Inside Value selections. Costco Wholesale and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On August 27, 2008, at 4:03 PM, bookman1952 wrote:

    I worked at Borders until April when I was laid off in their "restructuring." I have worked off and on in bookstores since college at independents and one other chain (B. Dalton under Dayton-Hudson in the 80s.)

    Borders is the most poorly run of these businesses. Their computerized inventory system is outdated as is their inventory strategy even before the big cuts.

    As stated in this Motley column, the latest numbers from Borders are vapor. Their inventory cuts--drastic cuts in CDs and books and the cuts in employee hours may have reduced debt and expenses temporarily, but at a huge cost in sales and profit.

    In addition, the sale of their Australian and New Zealand stores also made the debt picture look better.

    Borders has no effective sales strategy--they are tactic driven--ready-fire aim.

    A case in point--they sell the Sony Reader, but have done little to market it. The unit is probably better and no worse than Amazon's Kindle, but Borders has created no buzz at all.

    Borders recently revealed its connept store which utilizes technology like downloads, and anchor sections in the store--designed with a 21st century look.

    On paper its a great idea, but most of the things highlighted in the store can be done at home.

    The idea of targeting certain sections in the store is a good one, but it's a day late and a (discounted) dollar short.

    I often wondered why Borders didn't emphasize the merchandise their niche customers want rather than the same books sold at discount everywhere.

    I shopped at the original Borders in Ann Arbor in the late 70s and it was a wonderful store. Borders even invented one of the first good book inventory systems.

    Borders needs to figure out what they are, but its probably too late. They didn't listen to the experienced store employees they had. Instead, they restructured.

    Books and bookstores will always be around. The death of the bookstore, especially the independent store has been greatly exaggerated.

    Borders probably won't survive the current economic climate in its present form which is unfortunate. Whoever buys it at the fire sale, I have some good advice......

  • Report this Comment On October 23, 2008, at 3:47 PM, Bikergrrl wrote:

    Bravo, bookman. I've been with Borders since 1998 and couldn't agree more.

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