Boring Portfolio

More on Borders
...Silly selling season?
by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Aug. 14, 1998) -- Major market indexes and the Boring Portfolio all finished the week lower. The main Boring news of Friday, as it has been the previous two days, is the meltdown in shares of Borders Group (NYSE: BGP).

On Tuesday, Borders stock closed at $30 1/4. That was down appreciably from BGP's flirtation with the $40 level after the company was added to the S&P 400 Midcap index last month, but it was still up a respectable 38% from the stock's 52-week low.

On Wednesday morning, Borders reported fiscal second-quarter earnings of $0.03 per share (versus $0.01 a year ago) on a sales gain of 17%. The earnings matched the Street's expectations and were in line with guidance the company has provided at the beginning of the quarter.

On the superstore side of the biz, sales rose 26% and comparable-store sales increased 5.4%. Sales for the largely mall-based Waldenbooks subsidiary dropped 3.9%, however -- a bit more than anticipated -- and "comps" came in below plan, at a negative 2.5%. Management attributed the mediocre Waldenbooks performance to sluggish sales in the month of May, with June and July coming in essentially "on plan."

Earlier in the year, Borders management had provided guidance of 5% to 6% comps for the Borders superstores and somewhere around -0.5% comps for Waldenbooks. In the followup conference call on Wednesday, management reiterated that full-year guidance, and they also reiterated their endorsement of $1.22 per share in earnings for the full year (which ends in January) and a target of 25% annual growth thereafter.

Following the conference call, the analyst at Prudential upped Borders stock to a "strong buy" with a 12-month target price of $46. Analysts at Lehman Brothers and William Blair reiterated their "outperform" and "long-term buy" ratings, respectively.

In a story on Bloomberg, analyst David Magee of Robinson-Humphrey characterized Borders' results by saying, "This was another good solid quarter from them, not enough to get people's blood racing, but it was good."

Magee has a "buy" rating on the stock. For that matter, every one of the 13 analysts that Zack's surveys has either a "strong buy" or "buy" on Borders.

Yet the stock fell sharply on strong volume on Wednesday and again on Thursday. With Friday's $1 1/2 loss to $24 3/4, BGP stands (sort of) 18% lower than it did 72 hours earlier.

If you look across to the stock of competitor Barnes & Noble (NYSE: BKS), you'll see a substantial retracement as well -- albeit not quite as dramatic as that of Borders.

Meantime, shares of (NYSE: AMZN), although down a bit on Friday, continue to show impressive strength.

Recognizing the obvious limitations of imputing a single unified motive to thousands of trading transactions, it's probably not too much of a stretch to infer that a fair number of folks have concluded that the profits of bricks-and-mortar booksellers will come under pressure as they face the "Damn the profits! Full sales ahead!" tactics of Amazon.

And perhaps they will -- the margins, I mean.

On the other hand, even as Amazon has rolled up sales (if not profits), Borders' sales and margins remain basically on plan. Surely we would have seen some evidence of a hit by now, no?

Having said that, I am entirely sympathetic with Borders shareholders who are frustrated to learn that the "official grand opening" of is now pushed back to September -- almost a full year beyond the original date for the roll-out.

Indeed, I've even heard some folks speculate in their frustration that Borders might simply scratch its entire e-commerce initiative and write off the whole deal.

Such speculation is silly in the face of a formally announced grand opening that will occur within a matter of weeks. Moreover, it would constitute an unthinkable black-eye for IBM (NYSE: IBM), who has been Borders' technology, uh, "partner" in the e-commerce initiative.

Also, the sellers appear to have ignored the terrific reception that Borders' international expansion into Singapore and (now) London has gotten -- and the firm plans to extend the rollout in the U.K. and Australia this year.

Borders has never, not once, missed a quarter in its entire existence as a public company. The tardy roll-out of the Website notwithstanding, this is a solid 25% per year grower. Yet the share price has gotten whacked all out of shape in a sell-off that has gone far beyond sensibility -- or at least my sensibility.

And with that off my back, I'm heading out to paint the house. Do have a great weekend, folks.

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

08/14/98 Close

Stock  Change    Bid 
 ANDW  -  1/8   15.88 
 CGO     ---    34.56 
 BGP   -1 1/2   24.75 
 CSL   -  3/8   43.56 
 CSCO  -  1/4   96.44 
 FCH   +  11/16 24.63 
 PNR   -  3/16  36.81 
 TBY   +  1/8   7.88 
                   Day   Month    Year  History 
         BORING   -0.96%  -6.59%  -6.41%  17.76% 
         S&P:     -1.13%  -5.17%   9.51%  70.96% 
         NASDAQ:  -0.69%  -4.39%  14.00%  71.97% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     96.44   168.38% 
   2/28/96  400 Borders Gr    11.26     24.75   119.88% 
   8/13/96  200 Carlisle C    26.32     43.56    65.48% 
    3/5/97  150 Atlas Air     23.06     34.56    49.89% 
   4/14/98  100 Pentair       43.74     36.81   -15.84% 
   5/20/98  400 TCBY Enter    10.05      7.88   -21.60% 
   11/6/97  200 FelCor Sui    37.59     24.63   -34.49% 
   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  14465.63  $9075.64 
   2/28/96  400 Borders Gr  4502.49   9900.00  $5397.51 
   8/13/96  200 Carlisle C  5264.99   8712.50  $3447.51 
    3/5/97  150 Atlas Air   3458.74   5184.38  $1725.64 
   4/14/98  100 Pentair     4374.25   3681.25  -$693.00 
   5/20/98  400 TCBY Enter  4018.00   3150.00  -$868.00 
   1/21/98  200 Andrew Cor  5218.00   3175.00 -$2043.00 
   11/6/97  200 FelCor Sui  7518.00   4925.00 -$2593.00 
                              CASH   $5686.93 
                             TOTAL  $58880.68