The Boring Portfolio

Boring Portfolio Report
Thursday, November 14, 1996

by Greg Markus (MF Boring)

ANN ARBOR, Mich., November 14, 1996 -- Another day, another record. The Dow closed above 6,300 (a record). The S&P gained 0.65% to set its own new high: 766. And the Nasdaq popped nearly 10 points (+0.77%) to set a new high of its own: 1270.

Not so for the Boring Portfolio. It lost $137.50, or 0.24%, as Borders Group gave back some of its recent gains following yesterday's pre-release of third quarter earnings information, and Cisco and Green Tree slipped a bit, as well. On the upside, Solectron gained $3/4 to extend its push into record territory: $60 dead ahead. Carlisle (trading ex-dividend today) and the big Ox had good days, too. Prime Medical stabilized at $10, with volume continuing at a torrid pace: today, it was over 639,000 shares.

Other than the Borders conference call with analysts this morning, I have nothing to report on any Borefolio stocks. Not even a Cisco techno-blurb. So I offer you some highlights from my coverage of the Borders teleconference -- which the company and I could have conducted via tin cans and a string, since Borders HQ is barely three blocks from my office.

As noted here yesterday, Borders Group reported a net loss of $2.7 million, or $0.06 per share as compared to a $0.15 per share loss for last fiscal year's 3Q. Analysts had been expecting a $0.09 per share loss. Consolidated sales increased 14.2% to $413.5 million. Gross margins expanded to 24.0%, from 22.8% last year.

As all Gaul was divided into three parts, so it is with Borders Group: there are the namesake superstores, the mall-based Waldenbooks chain, and a rudimentary Planet Music group. The company's strategy is to prune away any underperforming Waldens, while using the cash flow from the remainder to help finance continued expansion of the superstores.

The numbers from this quarter demonstrate that the plan is precisely on track. Sales increased 42.3% for the Borders superstores and declined only 3.8% for Waldenbooks, better than expected. More to the point, comparable store sales for Borders increased 8.6% for the quarter, while "comps" at Waldens were virtually flat -- again, better than expected.

At the end of 3Q there were 142 superstores, an increase of 15 during the quarter. Subsequent to quarter-end, Borders opened an additional 6 superstores. The company expects to end the year with 157 stores, or an increase of 41 during the year. Meantime, Waldenbooks closed 5 units and opened 5 during the quarter, leaving the total at 966 stores. In the conference call, management noted that their plan was to close 50 of the underperforming Waldenbooks stores in this fiscal year and have closed 26 to date.

In the conference call, management said they were "confident but not over-confident" about the all-critical fourth quarter. They see a "pretty good" line-up of new titles coming in, including new books by Michael Crichton, Walter Cronkite, and others; but they do not yet see a "block-buster" on a par with Howard Sterns's book last year. (Howard Sterns??)

This year has a compressed holiday shopping season due to the lateness of Thanksgiving. As a consequence, favorable weather conditions and the ability of stores to manage the holiday crush become particularly important. Some analysts have suggested that the compressed season could help bookstores, because they offer a convenient way to find something for everyone on your gift list. Since Borders has never experienced a compressed shopping season since the advent of the superstores, they do not know how that will turn out.

The company encouraged analysts to increase their estimates for the current full fiscal year to reflect the upside surprise in the third quarter but not to increase their Q4 estimates yet, owing to the inability to foresee yet how the weather and capacity variables will turn out. Management noted that they operated 460 Walden kiosks in malls last holiday season, with good results, and they intend to operate at least that many this year.

The company has also launched a holiday advertising campaign on television, something they did very little of last year. I haven't seen any of 'em yet, but perhaps that's because they've been focused in markets where new stores have opened. If you see one of the ads, let us know what you think.

Stock  Change    Bid
--------------------
BGP   -  7/8   35.25
CSL   +  5/8   55.38
CSCO  -  7/8   65.13
GNT   -  1/2   39.25
OXHP  +  7/8   54.00
PMSI  ---      10.00
SLR   +  3/4   59.63

                   Day   Month    Year  History
        BORING   -0.24%   2.86%  15.50%  15.50%
        S&P 500  +0.65%   4.34%  18.38%  18.38%
        NASDAQ   +0.77%   4.00%  22.04%  22.04%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     35.25    56.58%
   2/2/96  200 Green Tree    30.39     39.25    29.17%
  6/26/96  100 Cisco Syst    53.90     65.13    20.83%
  5/24/96  100 Oxford Hea    48.02     54.00    12.44%
 10/15/96  100 Solectron     54.52     59.63     9.35%
  8/13/96  100 Carlisle C    52.65     55.38     5.18%
   3/8/96  400 Prime Medi    10.07     10.00    -0.68%



    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   7050.00  $2547.51
   2/2/96  200 Green Tree  6077.49   7850.00  $1772.51
  6/26/96  100 Cisco Syst  5389.99   6512.50  $1122.51
  5/24/96  100 Oxford Hea  4802.49   5400.00   $597.51
 10/15/96  100 Solectron   5452.49   5962.50   $510.01
  8/13/96  100 Carlisle C  5264.99   5537.50   $272.51
   3/8/96  400 Prime Medi  4027.49   4000.00   -$27.49


                             CASH  $15435.93
                            TOTAL  $57748.43



Transmitted: 11/14/96