Boring Portfolio

<THE BORING PORTFOLIO>
Borders Reports
Q3 Conference Call Review

by Alex Schay (TMF Nexus6)
and Greg Markus (TMF Boring)

ALEXANDRIA, VA (Nov. 13, 1998) -- Financials have been streaming in at a rapid pace for companies stabled in the Boring Port, and this week we've tried to get in on some conference calls in order to provide updates on the existing holdings. Dale took off at the beginning of the week with a look at Cisco (Nasdaq: CSCO), and today we look at the third quarter conference call summary of Borders Group (NYSE: BGP) -- courtesy of Greg Markus (TMF Boring).

Some of the highlights include the company's affirmation that it does indeed expect to meet expectations of $1.22 per share for fiscal year 1999, which means that estimates for $1.14 per share in the company's crucial fourth quarter are looking solid. Implicit in that figure is comp store sales between 4%-4.5% at Borders and no worse than -1% comps at its Waldens locations. As well, Borders made substantial investments in current accounts -- with payables almost doubling and inventory up 14% -- as well as new-store openings in the quarter (opening 25 Borders Superstores, versus 3 in Q1 and 7 in Q2) in order to gear up for the fourth quarter. Without further ado, let's get to the call summary:

Borders Group (NYSE: BGP) today announced results for the third quarter of fiscal 1998 ended October 25, 1998. In addition, the company announced a change in management.

New CEO Philip M. Pfeffer, age 53, has been elected CEO and a director of the company. Robert F. DiRomualdo, formerly board chairman and CEO, will continue as chairman, focusing on strategic issues.

Pfeffer served as President and Chief Operating Officer of Random House from 1996 until its acquisition by Bertelsman earlier this year. Random House operated through 11 divisions, including operations in the United States, Canada, the United Kingdom, Australia, New Zealand and South Africa. Prior to that, Pfeffer served as chairman and CEO of Ingram Distribution Group Inc., whose Ingram Book subsidiary is the world's largest trade book distributor.

DiRomualdo said that he had been working with the board on succession planning for more than a year and a half, and when the sale of Random House was announced, DiRomualdo said it didn't take him long to mobilize. DiRomualdo said that Pfeffer is a person of vision, with the utmost integrity, a passion for what Borders sells, energy, a hunger to succeed, and a deep respect for Borders Group employees.

Third Quarter Results

For the 14th consecutive quarter, the company met earnings expectations consistent with prior guidance, reporting a loss from operations of $0.8 million or $0.01 diluted per share compared to $0.4 million net income or $0.00 diluted earnings per share in the third quarter of 1997. Consolidated sales for the quarter were $558.3 million, a 17.0% increase over the prior year sales of $477.3 million.

Borders sales, including four international stores, increased to $349.4 million, a 24.5% increase over last year sales of $280.7 million. The sales improvement at Borders reflects an increase in the number of stores during the preceding 12 months from 189 to 238. During the quarter, a record 25 stores were opened, including two in the U.K. and one in Australia. On a comparable store basis, Borders sales increased 3.6%, slightly below the guidance provided at the beginning of the quarter.

Waldenbooks reported sales of $187.3 million, a 3.5% decline from the prior year sales of $194.1 million. Sales results at Waldenbooks reflects a comparable store sales decrease of 1.5% and a reduction in stores from 927 to 896 over the prior 12 months. Waldenbooks operates four airport stores (along with six Books etc. airport stores), and this continues to be an area of interest for the company.

Other sales, comprised primarily of Books etc., Borders.com, and Borders outlet were $21.6 compared to $2.5 million last year. Sales at Books etc. continue to be strong, outperforming expectations. Books etc. opened two stores during the quarter, ending at 25 stores. There are currently 15 Borders outlet stores, and the company continues to monitor this program.

The company consolidated two west coast distribution facilities into one state of the art facility in Mira Loma, California. This new facility will improve delivery times and in-stock levels at both Borders and Waldenbooks stores. An unplanned distribution center backlog during the startup of the new facility, attributable partly to software startup problems, negatively impacted comparable sales during the quarter by 50 basis points at Borders and 90 basis points at Waldenbooks. The flow of products was affected for about eight weeks. The problems have since been resolved, the facility is up to speed, and the current quarter should benefit from this new facility.

Income statement highlights. Consolidated gross margin increased to 26.0 % of sales for the third quarter of fiscal 1998 compared to 25.6% for the third quarter of fiscal 1997 due primarily to reduced shrinkage. Selling, general and administrative expenses as a percentage of sales increased slightly to 24.8% from 24.7% due to continued spending on strategic initiatives. Interest expense was $4.6 million compared to $1.7 million last year. The increase in net borrowings reflects share repurchases, the Books etc. acquisition, and fixed and working capital spending.

Balance sheet highlights. Inventories increased to $1,128.6 million in the third quarter of fiscal 1998 from $987.8 million in the third quarter of 1997, a 14.3% increase. The increase was primarily due to 49 more Borders stores and the addition of the fulfillment center which occurred in the later part of 1997. Short term debt net of cash and cash equivalents was $307.9 million at quarter-end compared to $194.2 million last year.

Strategic Initiatives Borders completed several initiatives during the third quarter that will help achieve fourth quarter sales targets and contribute to continued sales growth over time. Among them is the opening of four international Borders stores including Oxford Street in London, 40,000 square feet; Brighton, England, 15,500 square feet; Melbourne, Australia, 27,500 square feet; and Glasgow, Scotland, 40,000 square feet. The customer reaction to each store has been extremely enthusiastic and confirms our optimism regarding the magnitude of the international opportunity. The Singapore store, opened in November 1997, continues to perform at a high level despite difficult economic conditions.

The new Waldenbooks Expert System, which is based on the principles of the Borders Expert System, was installed to improve the selection and availability of Waldenbooks backlist titles.

A record number of kiosks were opened during the quarter, including the company's first international kiosks.

For the complete Border's conference call summary, click here.

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11/13/98 Close

Stock  Change    Bid
ANDW  -  1/16  17.31
CGO   +  7/8   37.56
BGP   -1 7/16  23.25
CSL   +  1/2   44.38
CSCO  -  1/2   64.69
FCH   -  3/16  21.75
PNR   +  5/8   41.00
TBY   -  1/8   7.00
                   Day   Month    Year  History
        BORING   -0.83%   2.22%  -6.50%  17.65%
        S&P:     +0.68%   2.46%  16.00%  81.09%
        NASDAQ:  -0.17%   4.32%  17.68%  77.53%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96     64.69   170.03%
  2/28/96  400 Borders Gr    11.26     23.25   106.55%
  8/13/96  200 Carlisle C    26.32     44.38    68.57%
   3/5/97  150 Atlas Air     23.06     37.56    62.90%
  4/14/98  100 Pentair       43.74     41.00    -6.27%
  5/20/98  400 TCBY Enter    10.05      7.00   -30.31%
  1/21/98  200 Andrew Cor    26.09     17.31   -33.64%
  11/6/97  200 FelCor Sui    37.59     21.75   -42.14%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  14554.69  $9164.70
  2/28/96  400 Borders Gr  4502.49   9300.00  $4797.51
  8/13/96  200 Carlisle C  5264.99   8875.00  $3610.01
   3/5/97  150 Atlas Air   3458.74   5634.38  $2175.64
  4/14/98  100 Pentair     4374.25   4100.00  -$274.25
  5/20/98  400 TCBY Enter  4018.00   2800.00 -$1218.00
  1/21/98  200 Andrew Cor  5218.00   3462.50 -$1755.50
  11/6/97  200 FelCor Sui  7518.00   4350.00 -$3168.00

                             CASH   $5750.59
                            TOTAL  $58827.15

</THE BORING PORTFOLIO>

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