Boring Portfolio

Thoughts on Borders
... Time to sell?
by Greg Markus

ANN ARBOR, Mich. (Aug. 12, 1998) -- Seven of eight holdings in the Boring Portfolio scored in the plus column today as U.S. equities recovered from Tuesday's sell-off. Alas, the one stock that closed lower is among the Borefolio's largest holdings... and is also the one that posted its quarterly earnings results.

This morning, Borders Group (NYSE: BGP) reported that it earned $0.03 per share on sales of $546 million in its fiscal second quarter ending July 26. The EPS number, which compared with year-ago earnings of a penny a share, matched the Street's consensus forecast. Sales increased 17% over last year's $466 million.

Fine. So why'd the stock fall 5% in heavy trading -- while shares of rival (and Foolish Portfolio holding) (Nasdaq: AMZN) rose by an equivalent amount?

On that, I can only speculate, of course. And I will, while you bear in mind that my speculation may well be worth exactly what you've paid for it.

First, I see only good things on the superstore side of the biz. Borders sales were up a solid 26% over the year-ago period, to $339 million, and comparable-store sales rose 5.4% -- basically in line with expectations.

Sales for the largely mall-based Waldenbooks stores dropped 3.9%, however, to $186 million.

Not so fine.

Part of the decline at Waldenbooks was anticipated, reflecting Borders' strategy of closing the less profitable stores (which reduces total sales but improves profit margins). Part of the drop, though, was attributed to a slow month of May, which resulted in full-quarter "comps" for Waldenbooks coming in below plan, at a negative 2.5%. (Based on past conference calls, I'd estimate that something closer to half that amount had been anticipated.)

The third, and newest, line of the Borders Group business is the "other" category, which includes its 23 "Books etc." stores in the U.K. and the e-commerce Website. Quarterly sales in this line totaled $20.1 million. That compares with sales of $18.6 million in the immediately preceding (i.e., the April) quarter.

The company declined to break out sales from those of Books etc., but it's a reasonable inference that took in less than $2 million in sales since it opened for "public preview" in early May.

In the conference call this morning, Borders management said that the official grand opening for will occur next month... or almost a year beyond when the site had initially been anticipated to open its portals for business.

That can't sit well with at least some investors -- or perhaps I should now say some former investors. Some good-sized blocks of BGP changed hands today, at prices below yesterday's closing quote.

To their credit, I must point out (as I have inthe past) that the folks running have hardly been sitting on their hands all summer. They've improved the site substantially, and they've been listening carefully to users' suggestions during the "preview" stage. They insist that the site will be even better come the day of the grand opening, and they said today that they intend to ramp up a significant marketing effort ahead of the launch.

Okay, but it looks like they'll now miss the back-to-school crowd, at least online. And it looks like will have to do a bang-up fourth quarter if it will come in anywhere near the target of $25 million in sales for the year.

So why then am I holding?

First, I'm holding because -- frustration at the slowness of the operation aside -- Borders remains a solid business that remains on track to grow earnings by 25% per year for a good while yet.

Second, I'm encouraged by the fact that Borders senior management is taking stock options in lieu of salary this year. As someone mentioned on the call this morning, since the current price of the stock is below their option strike price, management has basically worked all year for free. That's gotta be focusing the energies at Borders HQ.

Third, as much as many of us obsess about the e-commerce biz, Borders' other initiatives -- international expansion, openings of Waldens and Books etc. at airports, and calendar sales at kiosks over the holidays (to name three) -- look like they are humming right along.

So am I crabby about the slowness in rolling out the e-commerce operation? You bet. But is that any reason to sell Borders?


FoolWatch -- It's what's going on at the Fool today.

08/12/98 Close

Stock  Change    Bid 
 ANDW  +  1/4   15.88 
 CGO   +  7/8   35.00 
 BGP   -1 7/16  28.81 
 CSL   +1       43.81 
 CSCO  +  9/16  98.56 
 FCH   +  1/8   25.00 
 PNR   +1 3/16  37.31 
 TBY   +  3/8   7.25 
                   Day   Month    Year  History 
         BORING   +0.30%  -3.52%  -3.34%  21.63% 
         S&P:     +1.43%  -3.25%  11.73%  74.42% 
         NASDAQ:  +1.83%  -2.50%  16.25%  75.37% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     98.56   174.29% 
   2/28/96  400 Borders Gr    11.26     28.81   155.97% 
   8/13/96  200 Carlisle C    26.32     43.81    66.43% 
    3/5/97  150 Atlas Air     23.06     35.00    51.79% 
   4/14/98  100 Pentair       43.74     37.31   -14.70% 
   5/20/98  400 TCBY Enter    10.05      7.25   -27.82% 
   11/6/97  200 FelCor Sui    37.59     25.00   -33.49% 
   1/21/98  200 Andrew Cor    26.09     15.88   -39.15% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14784.38  $9394.39 
   2/28/96  400 Borders Gr  4502.49  11525.00  $7022.51 
   8/13/96  200 Carlisle C  5264.99   8762.50  $3497.51 
    3/5/97  150 Atlas Air   3458.74   5250.00  $1791.26 
   4/14/98  100 Pentair     4374.25   3731.25  -$643.00 
   5/20/98  400 TCBY Enter  4018.00   2900.00 -$1118.00 
   1/21/98  200 Andrew Cor  5218.00   3175.00 -$2043.00 
   11/6/97  200 FelCor Sui  7518.00   5000.00 -$2518.00 
                              CASH   $5686.93 
                             TOTAL  $60815.06