Borders Books a Big Loss

Shares dipped Thursday as the retailer announced cost-cutting moves and plans to launch its own e-commerce site

As Borders Group (BGP) battles to shore up its business and fend off cut-throat competition, the Ann Arbor, (Mich.) book retailer is planning to start a new website, close almost half of its Waldenbooks stores, and possibly also sell or franchise most of its international business.

After launching its own online retail site at in May 1998, Borders had moved the operation to the online retailer (AMZN) in August, 2001. Borders subsequently signed an agreement with Amazon in which customers would order book, music and movie products through Amazon web sites for pick up at U.S. Borders stores, according to Standard & Poor's. Now Borders has reversed course and begun working on an e-commerce site of its own since the fall, which it hopes will launch in early 2008.

"Our company's performance has fallen short in an industry that is increasingly competitive, technology driven and price sensitive," Borders' new CEO George Jones said in a press release Mar. 22. "We recognize the urgent need to go on the offensive and drive significant change."

Borders has been struggling to make money as it battles not only Amazon for customers, but a host of other rivals ranging from Barnes & Noble (BKS) to the warehouse club chain Costco (COST). Meanwhile, the side business in selling music CDs has taken hits during recent years from the likes of Apple's (AAPL) online music store iTunes.

The book sellers have been fighting like dogs for customers and lowering prices, only to achieve more suffering. On Mar. 22, Borders announced that it lost $73.6 million during the quarter ended Feb. 3, compared to $119.1 million of net income during the same period of 2005. As the company spent money on things like its struggles to keep customers with more promotional discounts, the amount that Borders profits per sale fell to 30.6% from 33.6%.

Jones is now moving to bolster profits by trimming costs. During the last three months of 2006, Borders started paring its Waldenbooks specialty retail unit. The company is expecting to have around 300 Waldenbooks stores by the end of 2008 instead of the 564 it had at the end of 2006. Executives are also mulling strategic alternatives for most of the company's International segment, including its U.K., Ireland, Australia and New Zealand superstores and Books etc. business.

As Borders implements its recovery plan, it's not going to make any sales or earnings forecasts. But the company does expect to spend 2007 in transition, with earnings per share growth returning in 2008 and beyond. By 2009, Borders hopes it can improve its consolidated profit margins to 5% to 6%, compared to 1.8% in 2006. The Border Rewards program, which has nearly 17 million members, is destined for changes such as tailoring promotions to meet specific customer needs.

After the news, investors pushed Borders' stock lower by 2.8% to $20.84 in afternoon trading on the New York Stock Exchange March 22.

Borders isn't the only one taking hits right now. Barnes & Noble on Mar. 5 trimmed its forecast for 2007 and announced plans to close an Internet distribution center in Memphis, Tenn. in 2007. Instead, all the company's Internet orders will be fulfilled from a new center in Monroe, N.J. and an existing facility in Reno, Nev. (see, 3/5/07, "A Dreary Tale for Barnes & Noble"). On Mar. 22, the New York book seller said its net earnings increased 3% year over year to $127.0 million during the February 3 quarter, in line with the earlier guidance. But for the May quarter Barnes & Noble expects to have a loss between 8 cents and 12 cents per share, including 6 cents per share of loss related to the closing of the Internet center.

Barnes & Noble shares fell 2.8% to $37.90 in NYSE trading Mar. 22.

"This is an industry with generally unattractive fundamentals, but we still think Borders will return to its days as a steady, predictable business," Morningstar analyst Joseph Beaulieu said in a research note Mar. 9.