Foolish Forecast: Reading Up on Borders Group

Bookseller Borders Group (NYSE: BGP) is a company in transition as it works to return to profitability. It won't be easy, but a new management team appears to have a good read on what it will take to turn Borders around. Second-quarter earnings results released tomorrow will shed light on whether the company will return to the black in 2008.

What analysts say:

• Buy, sell, or waffle? Seven analysts follow Borders. Only one is bullish; the rest recommend you simply hold on to the stock.
• Revenue. Analysts are projecting $918.6 million in second-quarter sales, or about 6% above last year's second-quarter number.
• Earnings. Analysts see a quarterly earnings loss of $0.33; last year, there was also a bottom-line loss in the quarter.

What management says:
Back when Borders released first-quarter results, management said "that 2007 would be a year of transition as we execute our long-term strategic plan for the turnaround of the company." So it doesn't expect to start growing earnings until fiscal 2008.

What management does:
Management has a plan to return to profitability, which includes closing or "right-sizing" many underperforming Waldenbooks stores and unwinding the floundering international operations. Other initiatives include revamping the domestic superstores by lowering the focus on underperforming music and CD sales, as well as focusing on Borders rewards to better serve loyal and frequent customers. And finally, it plans on rolling out Borders.com in early 2008.

Margins	1/06	4/06	7/06	10/06	2/07	5/07
Gross	28.0%	27.5%	27.1%	26.6%	25.5%	25.3%
Operating	4.4%	3.9%	3.3%	2.4%	1.2%	0.7%
Net	2.5%	2.1%	1.6%	1.0%	(3.7%)	(4.0%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Borders has quite a bit of work to do before it stops the bleeding in its underperforming Waldenbooks and international businesses. Its goal is to get the Borders Superstores to 5% to 7% annual sales growth and boost operating margins to more than 5% by 2009. With uncertainty comes opportunity, because Borders' stock has quite a lot of potential if management can get growth moving in the right direction.

However, the competitive environment is challenging, as Borders and archrival Barnes & Noble (NYSE: BKS) fight over market share in the maturing bricks-and-mortar bookselling business, and Amazon (Nasdaq: AMZN) is the undisputed leader in online book sales. Books-A-Million (Nasdaq: BAMM) has carved an interesting, profitable niche, with 10% as much sales as Borders or Barnes & Noble. Time will tell if Borders can emulate the profitability others in the space have been able to realize.

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• Dueling Fools: Borders
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Borders is a Motley Fool Inside Value pick. Amazon.com is a Stock Advisor recommendation.

Fool contributor Ryan Fuhrmann is long shares of Barnes & Noble but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.