March 22 (Bloomberg) -- Borders Group Inc. will close almost half its Waldenbooks stores and may sell the majority of its international division after reporting an unexpected loss.

Borders, the second-largest U.S. bookseller, also said today that it will sever its contract with Amazon.com Inc., which has handled Borders' online sales for six years,

The retailer, based in Ann Arbor, Michigan, posted a fourth- quarter loss of $73.6 million, or $1.25 a share. It hasn't been profitable in a year. Sales rose 2.9 percent to $1.5 billion.

Chief Executive Officer George Jones called the results ``disappointing'' and said Borders will focus on redesigning larger bookstores and updating its Web site. Rival Barnes & Noble Inc. today said online sales rose for the first time in a year, resulting in a 3.3 percent gain in fourth-quarter profit.

Borders is ``getting away from some of the growth initiatives, such as international expansion,'' said Derek Leckow, analyst at Barrington Research Associates Inc. in Chicago. ``It probably will take a year or two to see the results.'' The company doesn't own Borders shares.

Shares of Borders fell 73 cents, or 3.4 percent, to $20.70 at 4:03 p.m. in New York Stock Exchange composite trading. They have declined 7.4 percent this year, trailing the 1.1 percent gain in the Standard & Poor's 500 Index.

A year earlier, Borders had a profit of $119.1 million, or $1.78 a share.

Earnings Estimates

Excluding certain items, Borders said it earned $1.61 a share in the fourth quarter. Eight analysts, on average, estimated $1.60 in a Bloomberg survey. Five estimated sales of $1.48 billion.

Borders said it won't provide earnings guidance this year.

``It is expected that 2007 will be a year of transforming and stabilizing -- but not significantly improving -- financial performance,'' it said in the statement. Borders expects to return to ``earnings per share growth'' in 2008. It wasn't more specific.

Borders receives a ``small percentage'' of the revenue generated from its Amazon-run Web site, and it receives no information about online customers, Jones said in an interview. Borders new Web site, due in early 2008, will break even or be profitable in the second year of operating, he said.

Under an agreement reached in 2001, Amazon.com handled Borders' online inventory, customer service and order fulfillment.

Investor Speculation

Some investors have speculated that Borders may be a possible buyout target or may merge with Barnes & Noble. Jones said investors should ``not waste time thinking'' about such speculation.

Borders will form partnerships with other companies and introduce computer and kiosks within stores that will offer discounts and coupons, Jones said. For example, travel or cooking departments may have special offers, he said. Some of these features will show up in stores beginning in the second quarter, he said. Most of the changes will occur in early 2008.

Borders said it will ``explore strategic alternatives'' for most of its international division, including its superstores in the U.K., Ireland, Australia and New Zealand and its Books etc. unit.

The company said it has hired Merrill Lynch & Co. to advise it on options for its U.K. and Irish businesses, and KPMG for its units in Australia and New Zealand.

``For us to be successful in reaching the goals we have for the domestic superstore business, we must significantly reduce investment'' outside the U.S., CEO Jones said in the statement.

Borders said it will close 250 underperforming Waldenbooks stores in the next two years, cutting the total number of those outlets to about 300 by the end of 2008.

Margin Forecast

The operating margin, or consolidated operating profit as a percentage of sales, should reach 5 percent to 6 percent by 2009, up from 1.8 percent now, as sales at existing stores climb by ``low to mid-single digits,'' Borders said.

Fourth-quarter revenue rose 2.3 percent to $960.3 million at Borders bigger U.S. stores and dropped 8.3 percent to $286.4 million at Waldenbooks. International sales climbed 23 percent to $249.6 million.

Borders sought to boost in-store traffic by adding a customer loyalty program in February 2006. Participants collected points for buying items, then could redeem them for discounts on future purchases during the holiday season.

Barnes & Noble, the world's largest book retailer, said fourth-quarter profit rose to $126.9 million, or $1.84 a share. Earnings missed analysts' expectations pushing the company's shares lower. Sales climbed 7.1 percent to $1.88 billion.

Barnes & Noble has 15 percent of U.S. book sales, while Borders has about 13 percent. Amazon.com controls about 10 percent of the market.

To contact the reporters on this story: Carol Wolf in Cleveland at cwolf@bloomberg.net; Hugo Miller in Geneva at hugomiller@bloomberg.net

Last Updated: March 22, 2007 16:10 EDT