Pull out your black-ink pens, Borders (NYSE:BGP) investors. It's just about time to cross one more fiscal year off the calendar for the book-selling giant. By tomorrow evening, Borders' Q4 and full-year 2005 financial performance will enter the history books, and we can look forward to a new fiscal year -- hopefully, one in which the company's stock price doesn't fall in inverse proportion to the S&P's rise. Let's take a look at the numbers and see how likely that might be.

Wall Street Wisdom:

  • General consensus. The nine analysts watching Borders are cautiously optimistic about the company. While seven of them still rate the stock a hold, two venture forth with buy ratings.
  • Revenues. Analysts believe that Q4 2005 sales bested Q4 2004's numbers by 3.4%. $1.42 billion is the target.
  • Earnings. Profits are expected to do twice as well tomorrow. Wall Street is looking for an 8.6% improvement, to $1.76 per share.

Margin watch:
Borders has never been known for its huge profit margins, but 2005 was a worse year than usual. Borders' net, currently at 2.6% on a rolling basis, hasn't been this low since 2002.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

28

28.1

28.2

28.2

28

27.6

Op.

5.9

5.8

5.7

5.4

5.1

4.6

Net

3.3

3.2

3.4

3.2

3

2.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
What's behind the margin slide? If you flip back through the SEC filings to find Borders' last earnings release, you'll see that the company twice blamed the unusual culprit "de-leveraging" for both gross and operating margin deterioration. What does that mean? My guess is that Borders is saying: "We're a big chain. If we sell lots of books, our size helps us to expand margins. If we sell fewer books, but pay the same fixed costs to remain a big chain, our margins contract."

Seems logical. Basically, if Borders wants to turn its business around, it needs to get sales growing faster than the 2.4% per annum that it's managed year-to-date. Faster sales growth will help it "leverage" its size and keep more of those sales dollars as profits. In that regard, tomorrow's expected 3.4% sales increase would be a step in the right direction.

I'd also suggest that you keep an eye on the company's balance sheet tomorrow. With sales growth in the ultra-low single digits, you don't want to keep seeing inventory increases of 10% and 5%, as we saw in the last two quarters. If inventories do keep growing faster than sales, the company will eventually have to unload the merchandise at discount prices -- which could undo any good that better sales might accomplish.

Fool contributor Rich Smith has no interest, short or long, in any company named above.