Boring Portfolio

<THE BORING PORTFOLIO>
Book Value
A Borders Group Page Turner

by Alex Schay (TMF Nexus6)

ALEXANDRIA, VA (Nov. 20, 1998) -- Atlas has been shrugged -- we sold 150 shares at $36 15/16 on Thursday. The total return from Atlas logged in for the day prior was 62.36%, and with the closing price and attendant transaction costs we get a return of 59.67%. Now, wiping away the tears, Dale and I will turn our attention to brawny bookworm Borders Group Inc. (NYSE: BGP).

"Bad books are still books, and therefore sacred."
-- Gunther Grass (sorry about the punctuation Gunther, no German keyboards)

"Books may be sacred, but book stocks aren't."
Anonymous, sacred cow killing Fool

As confirmed bibliophiles, Dale and I think we might be able to "add some value" to any analysis of companies that sell books at the retail level. However, the perils of projecting one's own inherently limited experiences onto the world can at very least, lead to a strange conception of the world. At worst, a nightmarish dystopia emerges, populated only by characters whose emotional and intellectual make-up (and hence, decision making) mirrors your own. If this condition jibed with reality, it would make investing in consumer product companies pretty easy, but the rest of life would be mind-numbingly boring.

Sure, meaningful conclusions about mass consumption can be made for investment purposes; we're just careful not to extrapolate or generalize or universalize or engage in naive psychology without first acknowledging that we might be doing so. That having been written, let's get down to business. Why do people buy books?

Price and selection should immediately come to mind. However, the 80-20 rule is definitely in "full-effect" among the book-buying populace -- and this has been confirmed by numerous studies conducted by publishers. This cult devoted to the written word can usually be found at some retail establishment, be it a rare species of independent bookseller, or the more ubiquitous, "26,000 square foot -- mocha latte pushin' -- 20%-off hardcovers" behemoth. The emergence of a new node on the distribution chain, the online bookstore, has thrown an element of chaos into the economic equation for the bookseller. The Borders Group 10K for fiscal year 1997 was kind enough to take note of the prospects for online retail:

"Recently the Internet has emerged as an avenue for retailing in all media categories that the Company carries. In particular, the retailing of books and music over the Internet is developing rapidly. Competitors on the Internet include Amazon, Barnes & Noble, N2K, CDnow and others. The Company does not believe that sales to date on the Internet have materially affected the Company's sales, but Internet sales are expected to become more significant over time."

Understatement of the year, right!? However, as more than one commentator has opined, the book-buying experience can be likened to watching movies on VHS and at the theatre. The rise of the home-movie led many to conclude that audience size at conventional screens would take a hit. Wrong. This has yet to materialize. Similarly, legions of book fans that still need to browse, caress the spine of a book, examine the chapters, and even read (gasp) the pages, can do so by means of the conventional bricks and mortar corner store. For any true book-lover this is the only way to buy.

Of course, the severely time-constrained book lover may have a different opinion. Dale and I make almost weekly online orders, because we know what we want, we like the price, and it's really quick and easy. My own conventional store purchases have plummeted (though still high) since the advent of the online book order. Despite this, the corner store is still not going anywhere -- pun intended. More pertinent to the business model of the book giant however, is how it handles the build-to grow strategy and what the economics of these returns are. Let's take a look at some key operational metrics for Borders:

ROIC                   10.55%
(no conversion of operating leases to capital)
Boring Ratio            5.85%
Working Capital        94.90
Inventory Turnover      1.70
Capital Turnover        2.84
Days in Inventory     228.64
Day Sales Outstanding   7.99
Days in Payables      127.89
Cash Conversion Cycle 108.74
Asset Turnover          1.45
Assets/Equity           3.05
PP&E Turnover           6.20
Net Margin              3.46%
ROA                     5.02%
ROE                    15.31%

While some of these trailing metrics look solid, we need to get a sense of what the companies incremental returns have been as it continues to build locations. This discussion will continue on Wednesday of next week, along with a peer analysis. Until then, head for the Boards and have a great weekend.


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11/20/98 Close

Stock  Change    Bid
ANDW  -1       16.69
BGP   +1 3/16  23.25
CSL   -  5/16  45.69
CSCO  +1 5/16  74.63
FCH   +  3/8   22.50
PNR   -1       39.31
TBY     ---    7.00
                   Day   Month    Year  History
        BORING   +0.80%   6.12%  -2.93%  22.14%
        S&P:     +0.95%   5.90%  19.90%  87.18%
        NASDAQ:  +0.44%   8.85%  22.79%  85.23%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96     74.63   211.51%
  2/28/96  400 Borders Gr    11.26     23.25   106.55%
  8/13/96  200 Carlisle C    26.32     45.69    73.55%
  4/14/98  100 Pentair       43.74     39.31   -10.13%
  5/20/98  400 TCBY Enter    10.05      7.00   -30.31%
  1/21/98  200 Andrew Cor    26.09     16.69   -36.04%
  11/6/97  200 FelCor Sui    37.59     22.50   -40.14%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  16790.63 $11400.64
  2/28/96  400 Borders Gr  4502.49   9300.00  $4797.51
  8/13/96  200 Carlisle C  5264.99   9137.50  $3872.51
  4/14/98  100 Pentair     4374.25   3931.25  -$443.00
  5/20/98  400 TCBY Enter  4018.00   2800.00 -$1218.00
  1/21/98  200 Andrew Cor  5218.00   3337.50 -$1880.50
  11/6/97  200 FelCor Sui  7518.00   4500.00 -$3018.00

                             CASH  $11273.22
                            TOTAL  $61070.09

</THE BORING PORTFOLIO>

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