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Borders Abuzz
By
Last night, the Ann Arbor, Michigan chain that helped introduce the world to big, comfortable bookstores reported that fiscal fourth-quarter net income jumped 14% to $98.5 million, or $1.23 per diluted share, compared with $86.7 million, or $1.06 per diluted share, a year ago. The mark was in line with analyst estimates.
Sales for the quarter jumped 15.6% to $1.1 billion, and superstore sales on a comparable basis jumped 6%. For the year, sales jumped 15% to $3 billion, up from $2.6 billion a year ago. Net income (minus a one-time charge) increased just 2% to $93.7 million as sales, general, and administrative costs and interest expense increased.
Sales at Borders.com, the company's Internet venture, increased 289% to $17.9 million for the year, and generated a net loss of $17.2 million, or $0.21 per share. For the quarter, Borders.com lost $0.07 per share, compared to $0.04 per share last quarter. The company is playing catch-up online, to say the least. Rival barnesandnoble.com (Nasdaq: BNBN), for example, had sales of $203 million last year.
Borders shares have been active since the company's March 3 announcement that it had hired investment bank Merrill Lynch (NYSE: MER) to explore strategic initiatives to boost its sagging share price. The company's shares are up 16% to $14 15/16 since the announcement.
Merrill Lynch analyst Daniel Barry raised his near-term rating on Borders Friday -- the same day the bookseller announced it had hired the investment bank. Go figure.
We've written this story 100 times, but it's worth saying again, especially when an example like this crops up. Investors need to tread carefully when analysts issue research reports on firms that are investment banking clients. There's no plainer example of a conflict of interest. This doesn't mean the conflicts of interest are resolved in the wrong way, but the conflict is there and it would be foolish not to acknowledge it. Barry upgraded his rating to "near-term accumulate" from "near-term neutral."
That said, it looks like the analyst made the right call. After all, short-term ratings are aimed at making clients money in the short term -- over the next three months -- and shares of companies exploring strategic options usually go up a few points. That's what happened here, and investors that followed Barry's advice Friday profited.
But we don't try to predict short-term moves in stocks at The Motley Fool, and we don't think investors should either since no one really knows what's going to happen to stocks in the short term. We recommend buying shares of great companies and holding on for the long haul.
Meanwhile, it's been a brutal 18 months for Borders. Since August 1998, shares have fallen from a high around $40 to a low around $11, mostly on concerns that Internet companies like Amazon.com (Nasdaq: AMZN) would eat its lunch. Couple that with Border's snail-like move to go online and negative sentiment toward retailers in general this year, and Borders shares have performed miserably.
It's been a tough stretch for a company whose stores have performed well in many regards. Borders is the second-largest operator of so-called book superstores in the U.S. -- second only to Barnes & Noble (NYSE: BKS) -- but its outlets generate higher per-store volume than Barnes & Noble, according to a report by Barrington Research.
The company had a solid Christmas season, is growing faster than the book market as a whole, but trades at less than 1x sales.
In a January research report, Barry said the company's solid comparable-store sales underscored his belief that concerns about Internet competition were overdone. Though he maintained a "near-term neutral" rating on the stock, he sounded fairly positive about the company. He could make a good case that he was going to upgrade his rating anyway. We'll never know.
Barry did not return calls seeking comment on Friday.
News to Go
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Biotechnology firm Human Genome Sciences (Nasdaq: HGSI) plans to make a private offering of $300 million of convertible subordinated notes due in 2007. The money will be used for expansion and to fund pre-clinical programs already underway.
Automakers General Motors (NYSE: GM), Ford Motor (NYSE: F), and DaimlerChrysler (NYSE: DCX), and technology firms Oracle (Nasdaq: ORCL) and Commerce One (Nasdaq: CMRC) plan to set an initial public offering for their online purchasing exchange in 90 days, Bloomberg reported.
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