By Brian Lund (TMF Tardior)
May 19, 2000

Let me put my biases on the table right at the start: I love bricks-and-mortar book purveyor Borders Group (NYSE: BGP). I won't use the more fashionable "clicks-and-mortar" epithet, however, until Borders.com achieves 10% of rival barnesandnoble.com's (Nasdaq: BNBN) sales. The $5.3 million in first-quarter revenue that Borders.com reported this morning is about $2.5 million short of that target. Furthermore, Borders.com's sales accounted for less than 1% of the company's total revenue -- and, coincidentally, less than 1% of Amazon.com's (Nasdaq: AMZN) sales last quarter.

Borders.com cut $7.1 million off of pretax income this quarter, knocking the company into negative earnings territory. Net loss came in at $900,000, or about $0.01 per share, in line with analysts' expectations. The online site isn't really to blame, however. Borders hasn't sunk very much cash into marketing and development for it, because management doesn't want to turn it into the company's money pit. That distinction is reserved for the Waldenbooks chain.

Walden hasn't done anything right since Henry David Thoreau died. The mall-based stores are cramped, and have a limited selection and high prices. They are in every way the antithesis of Borders superstores, which I find open, well-stocked with titles at reasonable prices, and staffed by knowledgeable employees.

Walden demonstrated its worth (or lack thereof) once again today. Sales for the quarter were $185.3 million, down 1.7% from the prior year. It's true that Borders has been closing Walden stores -- it has eliminated about 6% of them in the last three years -- but that wasn't the problem this quarter. The problem was a 3% drop in comparable-store sales (comps). Of course, they were up against a pretty tough comparison from last year's first quarter, when comps fell 2.3%.

          1996   1997   1998   1999   2000Q1
Borders   9.9%   8.0%   3.5%   5.4%   2.3%
Walden    0.1    0.0   -1.0    0.7   -3.0

It's clear that Walden is the problem child. It showed an operating loss this quarter, compared to a $30 million operating profit at Borders superstores. On the other hand, comps aren't really trending the right direction for Borders, either. Borders has doubled its number of stores in the last four years, so market maturity is probably not the cause of the decline in comps. It's perhaps more likely that the cause is -- dare I say it -- online shopping.

Borders isn't just rolling over, though. The superstores boosted sales 14% to $447 million this quarter, mostly through expansion. Cost of goods sold (COGS) and selling, general and administrative (SG&A) expenses both fell as a percent of sales in the division, yielding a 16.6% improvement in operating income.

Company-wide, Borders has knocked eight days off of its days inventory outstanding through improvements in its supply chain. Nevertheless, inventory stuck around 176 days in 1999, turning just over twice a year. That's not very often. Barnes & Noble (NYSE: BKS) turned its inventory 2.5 times last year, and Amazon managed nine turns. If Borders could turn its inventory as often as Barnes & Noble, it would free up an additional $400 million for use during the year.

Borders.com may be the whipping boy for losses at the company, but Borders has divisions with more serious problems (*cough* Waldenbooks *cough*) that it needs to address. It also needs to find a way to increase traffic -- the best way to cycle inventory -- in its superstores. I hope it does, because I want to keep shopping there.

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