A Run From the Borders (Boring Port) December 16, 1998

<THE BORING PORTFOLIO>
A Run From the Borders
Boring Digitheads?

by Alex Schay (TMF Nexus6)

ALEXANDRIA, VA (Dec. 16, 1998) -- Today it seems that investors are running away from the Borders (NYSE: BGP), as the brawny bookworm fell $1 5/8 to $19 1/2 on over twice its thirty day average volume. A Wall Street Journal story this morning recounted some of the recent insider selling that has been going on, which we took some time to do last Friday as well:

• 11/19 George Mrkonic, an officer and director, sold 400,000 shares at $22.56, bringing his holdings to 168,993 shares.
• 11/24 Robert Diromulado, the Chairman of the Board, sold 158,000 shares at $22 - $26.25, bringing his holdings to 1,101,902 shares.
• 11/30 Richard Flanagan, an officer, sold 100,000 shares at $26 - $26.63, bringing his holdings to 167,354 shares.
• 12/07 Richard Flanagan filed to sell 100,000 shares.

In addition, the Journal devoted some commentary to the fact that Borders hasn't been as aggressive as some of its bricks and mortar competition in "marking up" the Web offerings -- like Barnes & Noble (NYSE: BKS), which finished the day up $1 3/4 to $32. While none of this is "news," the article did outline a central business issue (and therefore a valuation issue) that the superstores are facing this Holiday season when it quoted Danielle Turnof Fox, a J.P. Morgan analyst: "There is an uncertainty of the impact the Internet will have on the traditional superstore business."

This is precisely the question that has been raised on our Boring Portfolio Web message board in recent weeks, and an issue that we have set out to shed some light on. Since 1996, Internet book sales from Amazon.com and Barnes & Noble have climbed from $16 million to an estimated $589 million for full year 1998. The massive superstore ramp-up in the early-mid '90's definitely came at the expense of the independent bookstore, as buyers migrated to the world of couches, coffee, and biscotti. As superstores took business from the independents, it also seemed that overall book consumption grew faster than the compound rate for the first five years of the nineties -- check out these statistics at the American Booksellers Association. Expanding nodes of distribution brought more books to more people.

Similarly, the online explosion has done the same. The difficulty comes in trying to disaggregate the overall increase in purchases (that expanded distribution possibilities engender) with the erosion that seemingly has to occur at the superstore. Some studies have concluded that the net savvy populace is really the book buying "creme," in terms of average sales per booknut -- and ostensibly they bought at the corner store before diluting their purchase volume with the digital alternative. The inherent problem with the Holiday season business model of the traditional booksellers is the following: If the "gift purchase" is truly born of convenience, then that convenient gift is likely to be matched by a convenient purchase if it's available to a sufficient amount of people. Check out this study conducted for Marketing News.

We're not obsessed with the short term here, but these vital issues are being played out in the marketplace as we read and write today. Addressing these concerns are vital when constructing future growth models and placing a value on the "bigbox" bookstores. Buying books at the corner store -- which often happens to be a superstore these days -- is not going to change for the majority of book lovers. It's just that the 10,000+ websites that presently offer some kind of book ordering online are, bizarrely enough, having a material effect on the retail book business. Since we intend to have a valuation field day on Friday, today's report will conclude with some hopefully comforting thoughts about... digitheads. Yes, digitheads.

digithead n. A person who dismisses as unworthy any creative idea that cannot be readily expressed in mathematical formulae. Business Babble

A number of people, both on the message boards and in personal correspondence with the Boring Portfolio staff, have gotten it in their heads that we are indeed -- digitheads. That is, so wrapped up in our spreadsheets and valuation models that we've created a huge gulf between paper expectations and the inevitable results of -he trenches -- business "reality." To paraphrase an old politico on this one, "I've known digitheads, and we dear net denizens, are no digitheads." While I'm personally flattered by the characterization, Dale and I always make it our primary concern to figure out why people are buying the products of the companies we are looking at. This "qualitative" dimension -- although really a false dichotomy with quantitative -- is ultimately the biggest issue in our Boring minds.

Until Friday, we'll see you on the boards.

• Discuss Boring Investing on the Boring Port message board.
• 10/01/98: The New Boring Port Transitions Facts

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Stock  Change    Bid
ANDW  -  1/16  17.44
BGP   -1 5/8   19.50
CSL   -  3/16  45.56
CSCO  -1 1/16  82.69
FCH   +  3/8   22.94
PNR   +  3/8   36.31
TBY   -  3/16  6.63

                   Day   Month    Year  History
        BORING   -1.45%  -0.76%  -2.81%  22.29%
        S&P:     -0.08%  -0.14%  19.74%  86.92%
        NASDAQ:  -0.16%   3.07%  27.95%  93.03%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96     82.69   245.17%
  2/28/96  400 Borders Gr    11.26     19.50    73.24%
  8/13/96  200 Carlisle C    26.32     45.56    73.08%
  4/14/98  100 Pentair       43.74     36.31   -16.99%
  1/21/98  200 Andrew Cor    26.09     17.44   -33.16%
  5/20/98  400 TCBY Enter    10.05      6.63   -34.05%
  11/6/97  200 FelCor Sui    37.59     22.94   -38.98%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  18604.69 $13214.70
  8/13/96  200 Carlisle C  5264.99   9112.50  $3847.51
  2/28/96  400 Borders Gr  4502.49   7800.00  $3297.51
  4/14/98  100 Pentair     4374.25   3631.25  -$743.00
  5/20/98  400 TCBY Enter  4018.00   2650.00 -$1368.00
  1/21/98  200 Andrew Cor  5218.00   3487.50 -$1730.50
  11/6/97  200 FelCor Sui  7518.00   4587.50 -$2930.50

                             CASH  $11273.22
                            TOTAL  $61146.65