Gather round, little children. Uncle Borders (NYSE:BGP) wants to read you a story.
The question is whether the story will be one of horror or happy endings when Borders reports earnings tomorrow. Right now, analysts are leaning toward the "horror story" line of thinking. And not just because the company plans to release earnings at nighttime, rather than in the morning. Borders has, itself, twice suggested that its story would have no happy ending.
Back in its second-quarter 2005 earnings announcement in August, Borders predicted that the third quarter (the one that will be reported on Tuesday) would show the company posting an $0.08 to $0.12 loss per share. More recently, the company warned last month that things were looking worse. In the waning hours of its third quarter, Borders announced that disappointing same-store-sales performance was likely to exacerbate its already bad quarter, resulting in a loss of between $0.16 and $0.20 per share. Sharpening their pencils and doing some quick arithmetic, analysts conferred and came up with a consensus prediction of $0.18 in losses.
But wait for the epilogue, because tomorrow's bad news won't close this year's book. Borders withdrew its previous earnings prediction for the all-important fourth (i.e., Christmas) quarter -- the one in which the company historically books more than 90% of its annual profits. Pre-earnings warning, Borders had guided investors to expect a continuation of its past trend toward modestly improving Q4 earnings ($1.53 in 2003, $1.62 in 2004, and, hopefully, $1.80 or better in 2005). The removal of that Q4 2005 prediction hints strongly at the company's being unable to maintain that trend.
In its place come two new trends -- toward capital expenditures and inventories exceeding sales growth. Assuming analyst projections are more or less accurate, Borders will post less than 3% sales growth over fiscal 2004 this year. Yet for the past four quarters, we've seen inventories rising faster than that in comparison with the company's year-ago quarters: up 10% in Q2 2005, 5% in Q1 2005, 6% in Q4 2004, and 4% in Q3 2004.
Similarly, capital expenditures have ballooned, as the company continues to remodel its stores in hopes of boosting sales growth. Over the past 12 months, Borders has incurred $161 million in capital expenditures -- 55% more than it racked up in the 12 months previous. As a result, free cash flow has declined to $65 million from $90 million during the same time periods.
All of which leads this Fool to suspect that Borders' report Tuesday will not be the feel-good hit of the season.
Check out the prequels to this column in:
- South of the Borders
- An Early Read on Booksellers
- Leave Borders on the Shelf?
- A Page-Turner at Borders
Fool contributor Rich Smith does not own shares of Borders. The Fool has a disclosure policy.
