Boring Portfolio

Boring Buys BGP
February 28, 1996

Borders Group, Inc. (NYSE:BGP)
500 E. Washington St., Ann Arbor, MI 48104
Phone: 313-913-1100

Closing Price, February 27, 1996: $22 1/8 (up 3/8)
Trade: Buy 200 shares, February 28, 1996

The Company

I came to Ann Arbor, Michigan, in 1970 to begin my graduate studies. Twenty-six years later, I'm still here (although no longer a grad student). And for 25 of those 26 years, Borders bookstore has been a part of my life, a place where I've spent many hours and even more dollars, happily.

Borders was founded by two brothers, Louis and Tom, in a small store about three blocks from my office. Almost from the start, and as it moved to progressively larger and larger spaces in town, Borders was distinguished by an unwavering focus on not merely satisfying customers but delighting and amazing them. Borders loyalists are not unlike Apple's fanatics in many ways (and I am both).

The way a bookstore wins customers for life is by having the books customers want, when they want them, and knowing where the titles are located in the store. The way to do that, Louis and Tom knew, was to link a team of savvy store personnel with the right technology for tracking inventory. So they proceeded to (a) hire arguably the finest bookstore manager in America, Joe Gable, and (b) develop from scratch a computerized system for keeping track of their growing inventory of titles.

So successful was the latter that the tail began to wag the dog. Borders made money not only from selling books but also from selling its inventory system. Indeed, when the company was bought out by K-Mart in 1992, its formal name was Book Inventory Systems, Inc. By that time, the company (now guided by former Hickory Farms president Robert DiRomualdo) had opened 19 Borders superstores in various locations across the US.

As everyone knows, K-Mart soon ran into deep financial troubles and spun off the Borders Group last year. Borders now has three components: its 116 superstores (second only to Barnes and Noble), Waldenbooks (#1 in the US), and the Planet Music chain (formerly CD Superstore).

Waldenbooks is a drag on the group, as mall-based retailing has slumped recently. The company has succeeded in "rationalizing" Waldenbooks and getting costs under control, however. The focus is on growing the Borders superstores. The Group plans to open 30 to 35 book and music superstores in the next two years. Many Borders feature extensive multimedia departments, browsing areas, and coffee bars.

The Stock

BGP shares were relatively flat in the last part of 1995 as investors worried about the lack-luster Christmas shopping season and how Borders would fare. The recent news is that the company did just fine, with seasonal sales up 15% overall, to $512 million. Same-store sales for the superstores was up 9.2% Waldenbooks was up basically flat for the season but nevertheless contributed to overall profitability.

As a result of this news, BGP has moved toward a new high, while Barnes and Noble shares flounder in the bottom half oftheir 52-week range. Borders recently announced that is "comfortable" with analysts' estimates of $.82 for the year ending January 1996 (to be reported in mid-March) and $1.05 for the fiscal year just begun. I've seen analysts' estimates of $1.45 for FY97.

As a consequence, the aggregate rating of 6 analysts (as compiled by First Call) has moved steadily over the past 2 months from 2.0 ("buy") to 1.6, to a current 1.5 ("strong buy"/"buy").

BGP market capitalization is approximately $890 million, with 40.4 million shares outstanding. Book value (no pun intended) is around $12/share. Debt is high, at $785 million--remember, this operation is only around a year old in its current incarnation. Cash flow was negative last year, what with the rapid expansion and getting Waldenbooks under control. That story should improve this year.


I love Borders. But that by itself is no reason to own the stock. Happily, the stock stands on its own. With an estimated EPS growth rate in the high 20 percent range, and based on the $1.05 expected for the coming year, BGP should reach $30 by mid-summer if everything goes according to plan. That would constitute a nice 35% gain from today's prices, in around six month's time. Not bad.

--Greg Markus (MF Boring)