MediaWeek (Vol 5, No 35) Retail Bookstore Results: BN, Smiths, BAM, Dymocks (Aust) Strategy + More

Barnes And Noble reported their first quarter results which were mixed (Press Release)

First quarter consolidated revenues increased 2.5% to $1.5 billion as compared to the prior year. First quarter consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) was $4 million as compared to a loss of $24 million a year ago. The consolidated first quarter net loss declined 28% as compared to the prior year to $41.0 million, or $0.78 per share.

Digital Content Sales Increase 46%
Bookstore Comparable Sales Increase 4.6%
Retail EBITDA Increases 88% to $75 million

“During the first quarter, we continued to see improvement in both our rapidly growing NOOK business, which saw digital content sales increase 46% during the quarter, and at our bookstores, which continue to benefit from market consolidation and strong sales of the Fifty Shades series,” said William Lynch, Chief Executive Officer of Barnes & Noble. “The growth in comps at retail and the continued strong growth of our digital content business, as well as increased cost management focus, were drivers in the business turning from an EBITDA loss last year to slightly positive EBITDA in the first quarter of this year. As announced yesterday, we are excited to expand our award winning NOOK digital bookstore and devices beyond the U.S. market and to work with U.K. retailers to bring millions of U.K. customers the best experience in digital reading.”

Retail

The Retail segment, which consists of the Barnes & Noble bookstores and BN.com businesses, had revenues of $1.1 billion for the quarter, increasing 2% over the prior year. Comparable bookstore sales increased 4.6% for the quarter, as compared to the prior year period. Comparable bookstore sales continued to benefit from the liquidation of Borders’ bookstores in fiscal 2012 and strong sales of the Fifty Shades of Grey series. Core comparable bookstore sales, which exclude sales of NOOK products, increased 7.6% for the quarter. BN.com sales continued to decline for the quarter.

Retail earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $40 million to $75 million during the first quarter, an 88% increase, driven by comparable sales increases, a higher mix of higher margin core products and increased store productivity.

College

The College segment, which consists of the Barnes & Noble College bookstores business, had revenues of $221 million during this non-back-to-school rush period. Comparable College store sales decreased 2.0% for the quarter, as compared to the prior year period. College comparable store sales reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

College EBITDA losses increased by $2 million during the quarter from a loss of $12 million a year ago to a loss of $14 million, driven by new store expenses and investments in digital education.

NOOK

The NOOK segment, which consists of the company’s digital business (including Readers, digital content and accessories), had revenues of $192 million for the quarter, essentially flat as compared to last year. Digital content sales increased 46% for the first quarter. Digital content sales are defined to include digital books, digital newsstand, and the apps business. Device sales declined for the quarter due to lower average selling prices and production scaling issues surrounding the popular newly launched GlowLight product resulting in unmet demand.

NOOK EBITDA losses increased by $6 million, from a loss of $51 million to a loss of $57 million, as a result of product markdowns on the recently announced NOOK price adjustments, as well as continued investments in the NOOK business.

Newco Formation

On April 30th, the company announced that it has formed a strategic partnership with Microsoft to form a new subsidiary, Newco, which is comprised of the company’s NOOK digital and College businesses. The company continues to be actively engaged in the formation of Newco and is in the process of implementing the work necessary to complete the Microsoft transaction. The company expects the Microsoft transaction to close this Fall.

Related:

BusinessWeek: Barnes & Noble Investor Elation With Microsoft Deal Fades
Publishers' Weekly: Content Drives Improvement at Barnes & Noble

Things seem to be going well for UK retailer WH Smiths which in advance of their full year results they announced they would perform at the top end of analyst expectations: Press Release:

WH Smith PLC will announce preliminary results for the year ending 31 August 2012 on Thursday 11 October 2012. Prior to its close period, the Company today issues the following pre close update.

The Travel business continues its good performance despite the current economic climate and its UK store opening programme remains on track. We continue to manage costs tightly and have delivered strong gross margin gains driven by good mix management. Travel continues to make good progress in winning new business in its international channel.

In the High Street business our focus on gross margin and tight cost control continues to deliver a good performance. In addition, High Street has seen an improvement in the sales trend of books following the recent positive publishing schedule.

WH Smith PLC expects the outcome for the year to 31 August 2012 to be at the top end of market expectations.  Both businesses remain highly cash generative.

Related:
Guardian: WH Smith shares hit all-time high as retailer expects good profits
Telegraph; Questor share tip: Update leaves WH Smith looking anything but grey

Books A Million announce their second quarter results (Press Release)

Books-A-Million, Inc. (NASDAQ:BAMM) today announced financial results for the 13-week and 26-week periods ended July 28, 2012. Net sales for the 13-week period ended July 28, 2012 increased 14.9% to $120.4 million compared with sales of $104.8 million in the year-earlier period. Comparable store sales for the second quarter increased 0.5%, compared with the 13-week period in the prior year. Net loss from continuing operations for the second quarter was $0.9 million, or $0.06 per diluted share, compared with net loss from continuing operations of $2.9 million, or $0.18 per diluted share, in the year-earlier period.

For the 26-week period ended July 28, 2012, net sales increased 12.7% to $233.5 million from net sales of $207.2 million in the year-earlier period. Comparable store sales declined 1.8% compared with the same period in the prior year. For the 26-week period ended July 28, 2012, the Company reported net loss from continuing operations of $2.8 million, or $0.18 per diluted share, compared with net loss from continuing operations of $6.3 million, or $0.40 per diluted share, in the year-earlier period.

Commenting on the results, Terrance G. Finley, Chief Executive Officer and President, said, "Results for the quarter reflect the contribution from our new stores that opened in the 4th quarter, the phenomenal success of the Fifty Shades of Grey series, and continued solid performance in kids, teen and general merchandise. Our team remains focused on diversifying our store assortments and adjusting our store layouts to support our core business and new categories as we prepare for the upcoming holiday season.”

The Company also announced today that the Company’s Board of Directors has authorized a program to repurchase up to $5 million in shares of its common stock. Stock may be purchased on the open market or through private transactions from time to time through March 31, 2014, dependent upon market conditions. The plan does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at management’s discretion. The Company currently has 16.0 million shares of common stock outstanding.

Related:
Publishers' Weekly:: New Stores Boost Books-A-Million

Interesting write-up on the state of the Australian retail book market with a focus on Dymocks the largely franchise operator of bookstores (Sydney Telegraph)

Dymocks managing director Steven Cox said Dymocks had benefited from the Borders and A&R collapse. Stores that were competing, in many cases, against a Borders and an Angus & Robertson store became the only specialist seller in the shopping centre. "We have gone from an over-supply in the Australian market to having gaps in the market and locations with no bookstore," Mr Cox said. "We have a real opportunity to connect with more customers."

Dymocks opened eight new stores last year and a new store at Charlestown this year, with one at Wollongong soon to open and several more in the offing, including one at Hornsby, which was left without a specialist bookstore after Borders closed. He is less concerned about Amazon. "We've competed with Amazon for many years and we spend a lot of time connecting with our customers," Mr Cox said.

"The challenge people have is finding something of quality. We have really knowledgeable staff, our stores are locally owned and operated, and we help people find great books. "Readers want to have confidence they are buying a great book and our strength is in that. Amazon can't compete with our level of service."

On price, Mr Cox insists that without changes to the import laws, bookstores will struggle to compete with online retailers. His stance pitches him against publishers, who won a battle in 2009 when the federal Labor government rejected parallel import laws.

Australian publishers have the exclusive right to publish books written by overseas authors. So if a major American or British author brings out a book, booksellers such as Dymocks must wait until the local publisher prints it, which in some cases can be months after the overseas release. For the publisher, it means they can effectively subsidize Australian authors through the sales of big-name overseas authors and profit from the biggest releases.

Borders (Australia) Online name to disappear (The Bookseller):

The Borders name will soon be retired as the Pearson Group looks to rebrand the remaining online store under their Bookworld banner.

Despite Borders stores disappearing from the UK and USA, the name had continued in Australia as an online e-book store, but will soon be replaced, according to reports in The Australian.

James Webber, the chief executive of Bookworld, a division of the Pearson Group, told the newspaper: “We just believe the Borders brand has had its day. There are no stores left and globally it’s been in demise so we believe there’s an opportunity to revitalize (the franchise).”

From Twitter:
Digitize Your Personal Backlist? For a Dollar? BookBusiness
Julian Barnes pays tribute to Parade's End by Ford Madox Ford for  Guardian
Nebraska Book Company Names Steve Clemente President And CEO (PRNews)
Why All Schools Need iPads: Ending Texas's Bizarre Control Over National History Textbooks http://tcrn.ch/NmskFk

BISG: Adult Fiction Now 30% of Sales

The BISG will release their updated annual survey of the publishing industry next week but their press release today offers some tidbits of information of interest to many who track the industry.

The overall US publishing market contracted 2.5% to $27.2Billion down from $27.9 in 2011 however the results suggest changes in the product mix or general deflationary pricing since volume was up 3.4% year on year.

Naturally a highlight of the study remains the growth of eBooks in trade and the study points to the general acceptance of buyers of Trade Adult Fiction to the eBook format.  According to the report fully 30% of revenues are now in eBook format and this is now the dominant format for buyers.  Overall the report compiles data from over 1900 publishers in for sectors:  Trade (fiction and non-fiction for adults and children), School/K-12, Higher Education and Professional/Scholarly Publishing.

More from the press release:

• In the overall Trade sector (encompassing Fiction and Non-Fiction for Children, Young Adults and Adults), e-books’ net sales revenue more than doubled in 2011 vs. 2010. This significant growth was particularly fueled by e-books’ performance in the Adult Fiction segment where, for the first time, they ranked #1 in net revenue among all individual print and electronic formats. 

• Among categories, both Religion and Children’s/Young Adults showed strong growth while Children’s/YA ranked as the fastest-growing category in publishing in 2011.

• Despite the negative impact of Borders’ bankruptcy and closures, particularly on print book sales, through three quarters of 2011, the Trade market held up equal with 2010 revenue figures, even showing a slight increase. 

• Brick-and-mortar retail remained the #1 sales distribution channel for publishers in 2011, as it did in 2010. Publishers’ revenue from direct-to-consumer sales nearly doubled, topping $1 billion for the first time.

The growth of E-Book

The e-book phenomenon continued through 2011, attributable to the ongoing popularity of e-readers, tablets, and other devices as well as publishers’ strategic production, distribution and marketing of content in all e-formats. 

In the overall Trade sector, publishers’ net sales revenue from e-books more than doubled: from $869 million, or 6% of Trade net revenues, in 2010 to $2.074 billion, or 15% of net revenues, in 2011. Units more than doubled as well: 125 million e-books sold in 2010, representing 5% of the Trade sector, grew to 388 million e-books, representing 15.5%, in 2011. While e-books showed increasing strength, the combined print formats (including Hardcover, Trade Paperback and Mass-Market Paperback) still represented the majority of publishers’ net revenue in the Trade sector at $11.1 billion for 2011. 

Within the Trade sector’s Adult Fiction category, records were broken as e-books became the dominant single format there in terms of net revenue for calendar year 2011 with 30% of total net publisher dollar sales. In 2010, e-books had ranked fourth among the individual print and electronic categories with 13% share. Adult Fiction e-book revenue for 2011 was $1.27 billion, growing by 117% from $585 million in 2010. This translated to 203 million units, up 238% from 85 million in 2010. Similar to the broader overall Trade sector, the combined print formats also represented the majority of publishers’ revenue in the Adult Fiction category, at $2.84 billion.

Overall industry numbers

Despite the prolonged impact of the Borders bankruptcy (particularly on orders of print format books) but buoyed by continuing popularity of e-books, publishers net sales revenue for the Trade sector was $13.97 billion for 2011 as compared to $13.90 for 2010. This was an increase of 0.5%.

The overall total U.S. book market (representing all commercial, entertainment, educational, professional, and scholarly sectors) declined just 2.5%, from $27.9 billion in 2010 to $27.2 billion in 2011. While overall net revenue was down, overall units were up 3.4%, from 2.68 billion in 2010 to 2.77 billion in 2011.

The Children’s/Young Adult category saw the highest year-over-year, increasing 12% from $2.48 billion to $2.78 billion. One factor was the enormous popularity of several blockbuster releases from publishers, particularly in YA Fiction. Religious books rebounded in 2011 after a decline in 2009 with its growth reflecting the category’s digital transition as well as success of several major titles.

Sales distribution channels

Despite the Borders bankruptcy resulting in the closure of more than 500 stores in 2011, brick-and-mortar retail again ranked as the #1 sales channel for publishers in 2011: net revenue was $8.59 billion, representing 31.5% of total net dollar sales. This was, however, a decline of 12.6% from 2010

This year, it was followed by:

• Institutional sales (including sales to libraries, businesses, government, schools, and other organizations): $5.39 billion or 20%.
• Online retail: Reflecting broader national trends in consumer purchasing, revenue from sales through online retail grew 35% from 2010 ($3.72 billion) to $5.04 billion in 2011. This channel, which represented 13% of total publisher net dollars in 2010, grew to 18.5% of the total in 2011.
• Wholesalers/jobbers: Publishers’ revenues were $5.04 billion (18% of total) from this channel, which serves independent booksellers and mass merchants among other retailers.

A notable highlight in BookStats 2012: direct-to-consumer sales by publishers nearly doubled in revenue and topped $1 billion for the first time. In 2011, publishers saw $1.11 billion in direct-to-consumer dollars, growing from $702 million in 2010 – an increase of 58%.

MediaWeek (Vol 4, No 35) Distance Learning, Libraries and E-Books, Digital Textbooks + More

Online enterprises gain a foothold in traditional education (NYT):

While many students at the nascent institutions offer glowing reviews and success stories, a recent study by Teachers College at Columbia University that tracked 51,000 community college students in Washington State for five years found that those with the most online course credits were the least likely to graduate or transfer to a four-year institution. And traditional professors like Johann Neem, a historian at Western Washington University, see places like Western Governors University as anti-intellectual, noting that its advertising emphasizes how fast students can earn credits, not how much they will learn.
“Taking a course online, by yourself, is not the same as being in a classroom with a professor who can respond to you, present different viewpoints and push you to work a problem,” Professor Neem said. “There’s lots of porn and religion online, but people still have relationships and get married, and go to church and talk to a minister.”
But Anya Kamenetz, whose 2010 book, “DIY U: Edupunks, Edupreneurs and the Coming Transformation of Higher Education,” tracks the new wave of Web-based education efforts, says the new institutions will only continue to improve and expand. “For some people, it will mean going from a good education to a great one,” she said. “For others, it will mean getting some kind of education, instead of nothing.”

Trade publishers beginning to look hard at practical ways to deal with libraries for their electronic content (LJ):

David Young, the chairman and CEO of Hachette Book Group, acknowledged back in May, during a Publishing Point Meetup interview with Michael Healy, the executive director of the Book Rights Registry, that the company wanted an accommodation with libraries but that it was a challenge finding the right business model.
"That is, I think, a really really big question, and I wish I knew the answer to it. All I know is we're putting a lot of thought into it. I'm meeting the president of the ALA in New Orleans in June and we're talking with our various partners around that. I think it's something that needs a lot of careful thought because if you let that particular genie out of the bottle and get it wrong then you could get yourself in all sorts of trouble. Should there be a library solution? I'm certain there should be, but what it is we haven't figured it out. We're putting a lot of thought and effort into it."
Carrie Russell, the director of the American Library Association's Program on Public Access to Information, confirmed that then-ALA President Roberta Stevens and ALA Executive Director Keith Fiels met with representatives from Hachette and HarperCollins at the annual convention to discuss publisher-library collaboration.

The year of the digital textbook is upon us (IHEd):

In recent years, the focus on digital has been eclipsed by a surge in print textbook rentals. Companies such as Chegg.com and BookRenter.com — along with thousands of campus bookstores — have captured students who would prefer to consolidate the process of buying and then reselling textbooks into a single exchange at the outset of the semester. According to Student Monitor, 24 percent of students at four-year institutions rented at least one print textbook last spring — three times as many as purchased an e-textbook.
But recent search data from Google suggest that digital textbooks may prove to be a contender this year. According to the company, Web queries for “Kindle textbooks” are up 60 percent from this time last year. Same goes for “Nook textbooks.” Searches for “iPad textbooks” are up 40 percent. Whether or not students are buying e-textbooks this year, they seem to be shopping for them.
Google search data also suggest that more students are looking to curb costs by renting textbooks instead of buying them. Searches for "textbook rentals" are up 20 percent. Searches for "cheap textbook rentals" are up 40 percent.
So what happens when the digital and rental trends overlap?
One way of answering this question is to say that they already have. CourseSmart, a consortium that sells e-textbooks on behalf of the five major textbook publishers, has never sold permanent licenses for its digital textbooks. “Your use of the service does not give you any ownership rights in the e-textbooks; rather, you only have a limited right to access such e-textbooks,” CourseSmart asserts in its terms of service.
Another way of answering is to say that digital and rental will never overlap. That is because, unlike print, e-textbooks are never sold; they are licensed. Without the permissions conferred by the “First Sale Doctrine,” which bars publishers from dictating the terms of secondary sales (or rentals) of their books, Chegg and other vendors can only serve as alternative platforms through which students can buy or rent e-textbooks from publishers. They cannot set their own prices.

Fairfax County libraries switch focus to electronic content: WAPO

Electronic formatting has shown to be more popular in some genres, such as adult fiction, where it captured 13.6 percent of the net revenue market share. Area librarians said children’s books, specifically picture books, are not very popular among e-readers yet because the format does not translate as well as do text-only books.
“Our collection is driven by budget and demand,” said Trish Van Houten, assistant coordinator for collection management and acquisitions for the county library system.
In November, just before Christmas, the system had 2,177 electronic titles checked out. In July, more than 6,250 titles were checked out.
“It’s always interesting to watch new technologies take hold and become standards,” Van Houten said. “We saw the same thing 10 to 15 years ago with tapes and CDs. Any time there’s a new technology, everyone has to learn how to use it.”
Many public libraries use OverDrive, a digital distributor founded in Cleveland in the 1980s, to provide their digital stacks for readers. Learning to make the switch from buying e-books to renting them can take some getting used to, library staff said.
“I think the technology is in transition right now,” Smith-Cohen said. “It’s not where [readers] want it to be. It’s clumsy for most first-time users.”

Are research papers a waste of time? An online debate at the NYTimes:

The trouble with the question of whether research papers or essays are a better assessment of acquired knowledge is that it’s based on a false distinction. Any good research paper must have an argument, and any good essay must support its argument with evidence.

It’s certainly true that the nature of research changed with the advent of search engines that can do the looking and sorting and even some version of thinking — all things that students were once supposed to learn how to do for themselves. It doesn’t take long to gather lots of sources, fit them to whatever claim one wants to make, and thereby produce something that looks like the result of hours in the library spent reading and deriving conclusions from what one has read. But now, as in the past, a good teacher should be able to tell the difference between a phony piece of writing and an honest one.

From Twitter this week:

Why Did Borders Fail in S'pore? http://jglo.be/bgsg "tired selection of books confused music/film section relentless promo of bestsellers.

Ann Patchett’s Book Tour: NYT

Representative John Conyers Wants Copyright Law Revision: http://nyti.ms/mQ1DdT. Would it be consumer friendly though?

McGraw-Hill eyes education unit spin-off - FT.com -

Repost: Borders Strategic Plan: What Borders Could Have Said

Since management has changed again at Borders, I thought I would repost an article I originally wrote on March 26, 2007. As the introduction notes, I originally wrote my version of a Borders growth plan in answer to what I thought was a pretty anemic effort by CEO George Jones.

No telling what the new management of Borders has in mind.



Last week George Jones, the recently appointed CEO of Borders Stores, Inc. released his strategic vision for the next three years. There was little in the document to inspire, and it was replete with suggestions that the route to success for Borders was to travel the road already trod by their stronger competitors rather than develop a set of bold new ideas. Coupled with this mediocre set of objectives was a time frame that seems embarrassing given the critical issues Borders and the retail book industry are facing. Borders sales per store and per square foot which lag their competition are declining, they have embarked on a diversification program that continues to draw attention away for the core products and they propose to withdraw from the international market that appears to produce 50% more revenue per store than the domestic business. What then might George Jones have said.....


Dear shareholders,

Borders is a company in transition in an industry in transition. Borders customers now find the products we sell in more non-traditional outlets and at lower prices. Our customers now have more entertainment options limiting the time they spend on reading and the changes in the music and dvd industry is fundamentally changing the way our customers use and purchase these products. It may be only a matter of time before it becomes unprofitable for Borders to sell physical units of music and dvd products.

These are not issues that Borders faces exclusively, but over the past three years, the company has failed to proactively address these marketplace changes. While our in-store experience has grown confused and directionless, miss-steps in our internal operations now limit our ability to support an effective platform for growth. We have to admit that continued investment in our store management and merchandising technology will not produce or enable the rapid changes in operating efficiency that is required to effectively implement our strategic goals.

The Borders brand remains highly valued both domestically and internationally and as we consider our strategic options, we must resist the urge to adopt ‘me-too’ or duplicative retail models that succeed in this crowded marketplace. To that end, we will focus on maintaining a unique value proposition for the Borders brand and retail experience. Our goals over the next three years are to:

• Lead the industry in sales per store, sales per square foot, fill rates and inventory turn while, maintaining growth in new store openings.
• Aggressively eliminate non-core expenses in operations via strategic partnerships across the supply-chain.
• Revamp the Borders retail experience by redesigning our stores, implementing state-of-the-art technology and integrating web retail into the stores.
• We will expand our international retail operations in combination with partners, expand our Seattle’s Best Coffee relationship but devolve our investment in PaperChase.

Over the next three years the company will focus our improvement program in three areas: (1) Store improvement and better merchandising, (2) operational improvement and (3) efficiencies and expanding retail internationally and via the web. Each of these initiatives is addressed as follows:

Improving the In-Store Experience:
We are in the process of simplifying our in-store product mix and plan to temporarily reduce the amount of in-store product by 25-35% over the next six months. At the same time, we are aggressively revising and reassessing how we use our store-level sales data and have established a task force with an aggressive time horizon that will identify an effective management reporting package so that the company can better plan store inventory and product mix. (We also plan technology improvements at the store level discussed below). Once we have better management information, we will begin to experiment with incremental additions and regional additions to store mix that we expect will support store profitability.

Selling books, music and movies is our strength. Music and DVDs are important but the long-term viability for these product segments is suspect as on-demand, downloading and other direct to consumer distribution patterns become predominant. Frankly, we are not a music and DVD destination store and we recognize we sell these items as add-ons to book purchases which do improve average revenue per customer, but selling the products in their current form is not a long term strategy. Borders will continue to experiment with different mechanisms for selling music and movie content that will enable these segments to remain important revenue sources for us.

We also recognize that our in-store layout and retailing environment has grown stale and boring. As previously mentioned, we are in the process of redesigning the in-store concept and this is a matter of significant importance for the company. We expect to launch the new store concept no later than the fourth quarter 2007. In this important initiative, we do not expect a ‘me-too’ design or to simply replicate the store features of our competitors; rather, our objective will be to develop a unique approach to book retailing that combines an increased awareness of the correct product mix for our stores, market research and marketing statistics to determine the store features that resonate with our customers. Initial research suggests our current stores are bland and confusing to customers, who often leave our stores without finding the books they seek.

As previously disclosed, the company will reduce the number, and revamp the product mix, of our Walden Books mall stores. Critical to this effort is effective management reporting metrics enabling correct executive management decisions to close or significantly revise specific Walden stores. We expect to close 25% of our Walden stores over the next 18mths. While our small mall retailing business has declined, we still believe that mall-based retail outlets represent legitimate opportunities for Borders to retail our products. Along-side our Walden rationalization plan, we plan to test and launch a ‘mini-POD’ bookstore concept. These small stores will be located in high-traffic areas such as medium-to-small sized mall spaces, public spaces, high-traffic retail space and potentially within other retailers spaces. These ‘mini-POD’ stores will sell less than 200 titles (all best sellers based on our store POS data) be staffed by one clerk and cover less than 200 sq/ft; they can be either permanent or temporary fixtures, dependent on context. If the tests prove successful, we expect to have over 1000 of these mini-POD stores in place by the end of 2008.

Our airport store growth and re-branding effort has been resoundingly successful and we will continue to expand this program in the North American market. As part of our international expansion, we will consider opportunities to extend the model into the developing air transport markets of Asia.

The PaperChase acquisition has been an interesting experiment and the company stores continue to do well under Borders management. Regardless, the company’s future is in the sale of entertainment products and PaperChase will be carved off as a separate business and eventually sold to its management. We believe there is a future for this line of business but the synergy with entertainment products, our internal processes and between our vendors and those of Paperchase is tenuous at best. We believe we can generate higher sales/sq/ft from our traditional produce mix and Seattle’s Best Coffee.

Operations Review:
Borders must rationalize our internal operations so that we can focus on our core expertise. We are not proficient at software development, distribution, fulfillment or logistics, and over the years these areas have diverted too much management time, resources and money away from merchandising, retailing and brand development. It is our goal to seek strategic partners to further outsource our warehouse, fulfillment and distribution operations and to seek efficiencies in our logistics operations – particularly store fulfillment. Lastly, under discussion is the possibility of outsourcing our management information systems that support our store level point of sale systems and which connect these store systems to our merchandising systems. We believe the only way Borders can achieve the state-of-the-art technology critical to our success is to partner with a provider(s) who is simply better at implementation and IT management than we are. Discussions are advanced in these areas.

Coupled with this operations review, we will work with our vendors to implement Radio Frequency Identification throughout our supply chain. We believe this initiative will have particular value at the store level. Experience in other businesses indicates that this will be an expensive initiative but will lead to the following material benefits:

• RFID on all book product and in all stores within 18mths (on 85% of in-store products and 100% by end 2009)
• 100% location data for all products in store: ability to locate any item
• Virtually eliminate theft
• Increase in-store fill rates: Expect incremental sales increases between 5-10% of current store revenue ($250-500,000/store annually).
• Reduce out of stocks by 10-20%
• Reduce to 10% the current amount of time to stock new stores (to two days from 2 weeks)
• Remove/reallocate slow-moving stock: Rapid/immediate understanding of stock mix versus sales
• Daily inventory count: Eliminate need for physical inventory
• Speed product receipt and returns process

We expect to lead the book industry in this initiative and we also expect the initiative to pay for itself in increased sales, better merchandising and higher customer loyalty within a 36-month period. Complementary store-level technology enhancements will also enable wireless couponing, self-check out and cross- and up-selling opportunities. These are the types of critical success factors that will lead to the industry-leading revenues per store and per square foot to which we aspire.

Expanding Our Retail Outlets:
Finally, the company has questioned the continued development of our international operations, but we remain committed to expanding this business via merger with a leading non-US retailer. Together, we will aggressively expand the super-store concept to Asia and ME particularly China, India and South and Eastern Africa. Additionally, we will seek a similar partnership arrangement in South and Central American where we believe the super-store market for books, music and DVDs is largely untapped. The development of these markets is expected to take place through a combination of franchising and store-owned operations. We expect to announce our first Borders stores in Buenos Aires and Santiago by the end of the year. The UK book retail market is currently in turmoil and we will seek to take aggressive advantage of this and leverage our strong market position in that market with assertive merchandising and product discounting to drive traffic to our stores. We will close underperforming stores and expand the superstore concept in the UK and Ireland as results dictate. All told, we expect our international operations to grow to over 300 stores by the end of 2012 and believe our continued success internationally will derive from our steep investment in our US store operations.

Lastly, we commenced development of a Borders.com web retailing site which we believe will tap a missing link between Borders and its customers. We will use this site as a marketing and customer service solution to strengthen the bond between Borders and our customer base (particularly the 17,000 members of the Borders awards program). There will be a close coordination between the redesign of this program and the development of the web site. The success of this site will be determined by the strength of the connection we can make between the physical stores and the web experience. We expect to make the Borders web-site a destination site that will enable social networking, user tagging and customer retailing options similar to those available on auction sites.

We recognize this strategic plan represents a series of ambitious but attainable goals. Importantly, across our business we will focus on our core competency in selling entertainment products in a conducive retail environment supported by strong merchandising and management information. Supporting this development will be an aggressive efficiency program that will support the above objectives by realigning our operations to reduce time and expense spent on activities we are not good at and investing in technology solutions that will support our long term goals.

Many of these initiatives are in process and we look forward to bringing you up to date with them in the next three months.

MediaWeek (Vol 2, No 45): Money Issue

Several publishers reported earnings this week.

Simon & Schuster (CBS)

Publishing revenues for the third quarter of 2009 increased 2% to $230.4 million from $225.0 million for the same prior-year period reflecting the timing of the release of titles. Best-selling titles in the third quarter of 2009 included Arguing with Idiots by Glenn Beck and Her Fearful Symmetry by Audrey Niffenegger. In constant dollars, Publishing revenues increased 4% over the same prior-year period.

OIBDA for the third quarter of 2009 increased 10% to $28.4 million from $25.8 million for the same quarter last year and operating income increased 14% to $26.6 million from $23.4 million for the same prior-year period primarily due to revenue growth, partially offset by higher write-offs of advances for author royalties.

Hachette (Reuters) and The Bookseller:

Publishing revenues for the nine months to end September 2009 were €1,694m, up 8.3% on a reported basis and 8.8% on a like-for-like basis. Sales grew again in the third quarter of 2009, rising by 5.1% on a like-for-like basis. Other "main growth drivers" in the US included True Compass by Edward Kennedy, Say You're One of Them by Uwem Akpan, Lies My Mother Never Told Me by Kaylie Jones and Malcolm Gladwell's Outliers.

There was further sales growth in the United Kingdom but Spain reported a slight dip, mainly due to lower sales in education, Lagardère said. Lagardère said its publishing business faced "a particularly challenging fourth-quarter comparative", as the success of the Stephenie Meyer saga drove like-for-like sales growth to 6% in the fourth quarter of 2008.

ThomsonReuters (Press Release):

Glocer commented that 'the worse may be over'
Revenues from ongoing businesses were $3.2 billion, a decrease of 2% before currency and 4% after currency. IFRS revenues were down 4% after currency against the prior year period.

Underlying operating profit was up 3% to $711 million, with the related margin up 140 basis points, driven by the benefit of currency, integration-related savings and a continued commitment to strong cost management.

Adjusted earnings per share were $0.43 compared with $0.47 in the third quarter of 2008. The decline was due to higher integration-related spending, which is included in adjusted earnings but not underlying operating profit.

Borders announced that they would close the remaining mall stores by early 2010 (PR):

As part of Borders Group's ongoing strategy to right-size its Waldenbooks Specialty Retail segment and emerge with a smaller, more profitable mall chain in fiscal 2010, the retailer will close approximately 200 mall stores in January, leaving approximately 130 mall-based locations open. The list {of closures} is not final and is subject to change pending finalization of agreements over the coming weeks. Importantly, today's announcement regarding the mall business does not include Borders superstores or the company's seasonal mall kiosk business, which includes over 500 Day by Day Calendar Co. units, among other mall-based retail concepts.

Newscorp reported their results including improved results at Harpercollins (PR):

HarperCollins operating income of $20 million increased $17 million versus the same period a year ago due to higher sales at the Children's and General Books divisions, as well as reduced operating expenses from restructuring efforts in the prior year. First quarter results included strong sales of Where the Wild Things Are by Maurice Sendak, The Vampire Diaries by L.J. Smith and the paperback edition of The Story of Edgar Sawtelle by David Wroblewski. During the quarter, HarperCollins had 47 books on The New York Times bestseller list, including four books that reached the number 1 spot.

Torstar the parent of Harlequin reported (PR):

Book Publishing operating profit was $22.9 million in the third quarter of 2009, up $4.2 million from $18.7 million in the third quarter of 2008, including $2.0 million from the impact of foreign exchange. Year to date, Book Publishing operating profit was $63.1 million, up $9.9 million from $53.2 million in the first nine months of 2008, including $5.1 million from the favourable impact of foreign exchange. Underlying results were up in North America Direct-To-Consumer and down in North America Retail for both the third quarter and year to date. Overseas was down in the quarter but up year to date.

MediaWeek (Vol 2, No 40): Curating, Larsson, BooksEtc, Disney, Magazines

Interesting article in Sunday's NYTimes about curating content in the retail sense. Some relevance to book retailing and publishing although not specifically noted in the article (NYTimes):

The word “curate,” lofty and once rarely spoken outside exhibition corridors or British parishes, has become a fashionable code word among the aesthetically minded, who seem to paste it onto any activity that involves culling and selecting. In more print-centric times, the term of art was “edit” — as in a boutique edits its dress collections carefully. But now, among designers, disc jockeys, club promoters, bloggers and thrift-store owners, curate is code for “I have a discerning eye and great taste.”
Or more to the point, “I belong.”
For many who adopt the term, or bestow it on others, “it’s an innocent form of self-inflation,” said John H. McWhorter, a linguist and senior fellow at the Manhattan Institute. “You’re implying that there is some similarity between what you do and what someone with an advanced degree who works at a museum does.”
Indeed, these days, serving as a guest curator of a design blog, craft fair or department store is an honor. Last month, Scott Schuman, creator of The Sartorialist, a photo blog about street fashion, was invited to curate a pop-up shop at Barneys New York.

The Girl Who kicked the Hornets' Nest by Stieg Larsson is the final book in Stieg Larsson's posthumously published Millennium trilogy and seals his status as a master storyteller, says Nick Cohen of the Observer. Of course not available in the US until next year. (Observer):

I cannot think of another modern writer who so successfully turns his politics away from a preachy manifesto and into a dynamic narrative device. Larsson's hatred of injustice will drive readers across the world through a three-volume novel and leave them regretting reaching the final page; and regretting, even more, the early death of a master storyteller just as he was entering his prime.

In the UK Borders has announced that it will retire the BooksEtc and Borders Express brands (Independent):

Borders UK has confirmed it plans to remove the Books Etc and Borders Express brands from the high street. The bookseller – which in July completed a management buyout backed by the retail restructuring specialist Hilco – is trying to sell its remaining seven Books Etc shops and two smaller format Borders Express stores.

Books Etc has been a financial millstone around the neck of Borders UK for a number of years. The retailer's spokesman said: "I can confirm that our future strategy is single-brand." Earlier this month, Borders UK said it would close its Books Etc outlet in Staines, Surrey. The company, which has 36 core Borders stores, came close to collapse in July under its previous owner Risk Capital Partners, the private equity vehicle of Luke Johnson, the Channel 4 chairman.

Was Frankenstein too good to have been written by a woman? (HuffPo):

The debate has continued right up until the present day, most recently through the publication of John Lauritsen's The Man Who Wrote Frankenstein (Pagan Press, 2007). The logic of the doubters has not shifted noticeably for 200 years: Frankenstein is too good to have been written by a young woman, therefore it must have been written by a man.
Percy Shelley was indisputably present at the birth of the creature, who was born in the Swiss countryside during the unseasonably rainy summer of 1816. Mary and Percy Shelley were part of a group that included Lord Byron, Claire Clairmont, and John Polidori, Byron's personal physician. To beguile the hours, the group took to reading German ghost stories and decided to try and write their own. Mary was stuck for inspiration for several days when finally one night her dreams yielded up the image of a depraved scientist bringing to life a ghastly simulacrum of a man.

Read more at: http://www.huffingtonpost.com/victoria-rosner/co-creating-a-monster_b_301089.html

Disney launch a subscription based web site for children (NYTimes):

DisneyDigitalBooks.com, which is aimed at children ages 3 to 12, is organized by reading level. In the “look and listen” section for beginning readers, the books will be read aloud by voice actors to accompanying music (with each word highlighted on the screen as it is spoken). Another area is dedicated to children who read on their own. Find an unfamiliar word? Click on it and a voice says it aloud. Chapter books for teenagers and trivia features round out the service.
“For parents, this isn’t going to replace snuggle time with a storybook,” said Yves Saada, vice president of digital media. “We think you can have different reading formats co-existing together.”
Publishers, of course, have been experimenting with e-books for the children’s market for years. About 1,000 children’s titles are now available digitally from HarperCollins. Scholastic has BookFlix, a subscription service for schools and libraries that pairs a video storybook with a nonfiction e-book on a related topic. “Curious George” is available on the iPhone.

There may be a new service provider in the magazine space that would aggregate magazine content for readers using electronic devices such as the Kindle, Blackberry, and iTouch. (ATD):

The idea: The new company, which will operate independently from the publishers that invest in it, will create a digital storefront where consumers can purchase and manage their subscriptions, which can be delivered to any device. The pitch: Control a direct relationship with consumers while gaining leverage with heavyweights like Apple (AAPL) and Amazon (AMZN).
Industry executives briefed on Squires’s plan say it has been well received by Time Inc.’s peers and that several major publishers, including Hearst and Condé Nast, are expected to sign on for the JV, which isn’t scheduled to debut until 2010. No comment from Hearst, Condé Nast or Time Inc., a unit of Time Warner (TWX).

Newsweek looks at the 'controversy' over holding back big books from the eBook store and gets to the nub of the issue (NewsW):

Why isn't Amazon.com livid about this? After all, this technology firm is providing the beleaguered publishing industry a more efficient way to reach readers, and it's being stiffed on some big sellers. It may be that Amazon is losing money on many sales it makes of Kindle-ready books. With the Kindle, Amazon has inverted the old business model of giving away the shaver and selling the blades. Amazon is using the blades (cheap books, in this case) as a loss leader to induce people to pay up for the shaver (the $299 Kindle). As I understand it, Amazon pays the same wholesale price for Kindle books as it does for real books—generally 50 percent of the list price. For a typical hardback that retails for $26—say, E.L. Doctorow's Homer & Langley—Amazon pays $13 and then sells it for $9.99 on the Kindle, taking a $3 loss on each sale. (The longer-term strategy, publishers fear, is that once the Kindle gains significant market share, Amazon will negotiate lower wholesale prices for digital versions.) In the short term, though, this means that Amazon is likely to lose more money on more expensive books sold on the Kindle. It would have to pay $17.50 per "copy" of the digital version of True Compass, and $14.50 per copy for Going Rogue, but would sell them for significantly less. It may seem perverse, but once Amazon has sold a Kindle to a customer, it doesn't have all that much incentive to sell expensive books to the Kindle owner—unless it's willing to boost the prices of electronic books significantly.

The Kindle goes to Princeton to mixed reviews. However, in the comments students unload on the whiners (DailyP):

But though they acknowledged some benefits of the new technology, many students and faculty in the three courses said they found the Kindles disappointing and difficult to use.
“I hate to sound like a Luddite, but this technology is a poor excuse of an academic tool,” said Aaron Horvath ’10, a student in Civil Society and Public Policy. “It’s clunky, slow and a real pain to operate.”
Horvath said that using the Kindle has required completely changing the way he completes his coursework.
“Much of my learning comes from a physical interaction with the text: bookmarks, highlights, page-tearing, sticky notes and other marks representing the importance of certain passages — not to mention margin notes, where most of my paper ideas come from and interaction with the material occurs,” he explained. “All these things have been lost, and if not lost they’re too slow to keep up with my thinking, and the ‘features’ have been rendered useless.”

Borders Looks for "Selling Culture"

Admitting that hand selling is nothing new, Border's CEO Ron Marshall spoke about returning the company to one driven by sales rather than cost containment and supply chain improvements alone. In the press release accompanying their first quarter results he expands on this point,

"We continued to strengthen the financial structure of the company by making further improvements to cash flow, debt and adjusted EBITDA," said Borders Group Chief Executive Officer Ron Marshall. "Make no mistake about it, we have much more work to do and will continue to maintain our financial discipline. At the same time, we know that we cannot save our way to prosperity. Our long-term success will come from doing a much better job of driving sales and that's where our focus is right now."

The company reported significant top line declines in comp store sales; however, the company is making significant improvements in store product mix, supply chain costs and other key areas. The company saw significant improvements in certain product line gross margins but the proactive reduction in multi-media sales (DVD, Music) hid much of the improvement. The company also appears to have improved its debt position and according to their CFO is in compliance with all debt coverage obligations.

Other key metrics from their press release:

• Adjusted EBITDA in the first quarter was $3.0 million compared to an adjusted EBITDA loss of $14.3 million a year ago.
• First quarter cash flow from operations improved by $19.5 million over last year.
• Operating SG&A expenses and inventory were reduced from the prior year by $48.1 million and $254.9 million, respectively.
• Debt at the end of the first quarter was reduced by $266.0 million to $325.9 million a 44.9% reduction over a year ago and $10.3 million or 3.1% less than the end of fiscal 2008.
• Total consolidated first quarter sales were $641.5 million, down 12.1% from the prior year.
• Comparable store sales for the first quarter declined by 13.5% and 5.5% at Borders superstores and Waldenbooks Specialty Retail stores, respectively.

On an operating basis, the company generated a first quarter loss from continuing operations of $15.9 million or $0.27 per share compared to a loss of $30.5 million or $0.51 cents per share for the same period a year ago. On a GAAP basis, the first quarter loss from continuing operations was $86.0 million or $1.44 per share compared to a loss of $30.1 million or $0.50 per share a year ago. The $1.44 per share loss includes $1.17 per share of non-operating charges that were primarily non-cash.

On a side note, it looks like someone hacked their web site, (Link) and I am sure they will get that fixed soon.

Borders Reduces Corporate Staffing

Here is the corporate announcement from Borders. We sincerely hope it doesn't go any further.

Borders Group today announced that it has reduced its corporate workforce by another 136 positions, which were eliminated effective today. The majority of the jobs, which represent about 12% of the corporate workforce but less than 1% of the company’s total workforce, are based at the company’s headquarters in Ann Arbor. The workforce reduction was spread across virtually all business areas, including marketing, human resources, field management and corporate sales. The reductions were made at various ranks, ranging from entry level to middle management. Affected employees are being offered transition pay, severance and job placement assistance.

Today’s changes follow the company’s announcement just over two weeks ago that several top-level corporate positions had been eliminated to reduce management layers and help drive expense reductions. “While reducing payroll is never easy and we respect the impact it has on employees and their families, it is one of the necessary steps we must take along with other non-payroll expense reductions to help get this company back on track financially,” said Chief Executive Officer Ron Marshall. “In this time of transition, I greatly admire the tenacity and focus that employees at all levels here have shown as we drive to significantly reduce expenses and bring other key financial measures in line. We will continue to move forward with deliberate speed to make the changes required to get Borders back on firm financial footing.”

Borders Cuts

Borders has eliminated a number of senior positions at their corporate head quarters including the role of CTO held by Susan Harmon. Harmon held the position since 2007 having left book seller Books A Million to move to Ann Arbor from Birmingham AL. (I once went to Birmingham on a fools errand once).

From Forbes:

Bookseller Borders Group Inc. said Tuesday it is cutting six vice president and 10 director jobs to consolidate its management and help trim expenses in a tough economy.

Borders has eliminated the role of executive vice president of U.S. stores, which was held by Ken Armstrong, and cut the post of senior vice president and chief information officer held by Susan Harwood. Both Armstrong and Harwood joined Borders Group in 2007.

The position of senior vice president, e-business, which was held by Kevin Ertell, has also been eliminated.

Store Closings (Updated)

I have a tickler that sends me news items on various topics and one of these is news related to Borders. In the past two months or so, the citations listing store closings has become a torrent of store retrenching. Having announced earlier in 2007 that they would step up their store closings, the company appears to have accelerated this effort. Most of these closing are the Walden Books stores which has been a problematic store concept for some time and which the economy has only made worse.

In places like Lexington, MA and Great Falls, MT, Walden/Borders are leaving locations where their stores represent the only identifiable book store brand. Some people are upset and have started letter writing campaigns but the news of specific closings arrives so fast the community can't possibly organize fast enough. Truth is, no amount of community concern is going to trump simple economics. Sadly, other than in a few isolated cases, staff have not been offered work in other stores. Not only are there no other stores to move the staff to, but the Walden epidemic is often collected in news stories about other store brands shutting down in the same neighborhood or mall.

My incomplete list of closings noted just during January includes the following:

(Where is all this inventory going?)

Waldenstores:

Tippecanoe Mall, Lafayette Indiana
Logonsport Mall, Indiana
Stroud Mall, Penn
Volusia Mall, Daytona Beach, FL
Wyoming Valley Mall, Wilkes Barre, PA
Kenwood Town Center, Cinn, OH
Inland Center Mall, San Bernadino, CA
Sandberg Mall, Gailsburg, IL
Gainsville, FL
Contana Mall, B/Rouge, LA
Regency Mall, Racine, WI
Lexington, MA
Birlington Mall, Vermont
Greendale Mall, Worcester, MA
Sq One Mall, Saugus, MA
DeSota Sq Mall, Sarasota, FL
Prince of Orange Mall, SC
Bradenton, FL
Pompono Beach, FL
Tampa, FL
Orlando, FL
South Plains Mall, Lubbock, TX
Miller Hill Mall, Deluth MN
Clarion Mall, Clarion PA
Town Mall, Elizabethtown, KY
Marshall Town Center, IA
Holiday Village Mall, Great Falls, MT
Southridge Mall, Des Moines IA.

Borders Express:
Springfield, IL
Lahaina Mall, HI
Whalers Village, HI

Brentanos
Tower Place Mall, Cinn, OH

Borders:
Mill Avenue, Tempe AZ
Kemper Road, Springdale,OH
Compuware Bld (Downtown) Detroit, MI
Vero Beach Fashion Outlets, FL

Bonnie Schmick the Borders spokes person that each local reporter speaks to must be pretty depressed having to field all these calls.

(There are some misspellings in that list - apologies).

Update:

The NYTimes notes the decline of shopping Malls in a weekend article: NYTimes

I also posted my own view a few months ago in Death of the Big Box

George Jones Out at Borders

Borders books announced a number of senior changes including the replacement of their CEO George Jones and CFO Ed Wilhelm. The replacement for Jones is Ron Marshall who has bookselling experience having been with Crown books. Marshall has a strong financial background having served as CFO of $4billion Pathmark during the restructuring of that company in the late 1990s.

Border's replaced Wilhelm and VP Merchandising Rob Guen with internal candidates (Mark Bierley and Anne Kubek respectively) and appointed Dan Smith as Chief Admin Officer.

The company also reported predictably soft sales for the holiday period and with the intense promotions they were running look for gross margin impairment when they report their full quarterly numbers. From the press release:

Sales Results-Holiday 2008
Borders Group also released its sales results for the nine-week holiday period ended Jan. 3, 2009. Total consolidated sales were $868.8 million, an 11.7% decline compared to the same period last year. Within the Borders superstore segment, total sales for the holiday period were $652.6 million, which is a 13.6% decrease compared to 2007. Comparable store sales at Borders superstores declined by 14.4% compared to the same period a year ago. On a same-store sales basis, the book category at Borders declined by 11.0% for the period. Borders.com sales for the nine-week holiday period were $20.3 million. Overall, holiday sales started slow and improved during the latter part of the season. Within the Waldenbooks Specialty Retail segment, total sales for the holiday period were $161.7 million, a 16.4% decrease compared to the same period one year ago. Comparable store sales for Waldenbooks declined by 8.0% compared to holiday 2007. Total International segment sales were $34.3 million for the period, a 1.4 % decrease compared to the same period a year ago. Comparable store sales at Paperchase stores in the U.K. decreased by 6.5% for the holiday period year over year.

Borders Same Store Sales Down 13%

After the close, Borders reported their third quarter results and as predicted they were markedly off the same period last year. Comparable store sales for Borders superstores decreased by 12.8% in the third quarter, and with music excluded, declined by 10.6%. Same-store sales at Waldenbooks decreased by 7.7% for the period. Impairment charges pushed their loss from continuing operations to $172mm ($2.85) versus $40mm ($0.63) last year. Without those GAAP adjustments the profit performance was on par with last year.

From the press release:

"Borders has successfully reduced debt, improved operating cash flow, lowered expenses, improved gross margin-excluding occupancy-and improved inventory productivity during a time of extreme economic challenge," said Borders Group Chief Executive Officer George Jones. "We stated at the beginning of this year that strengthening our balance sheet is our top priority and we are delivering results. We'll remain keenly focused on these critical initiatives, and in addition, will increase our efforts to drive further gross margin improvement. All of the changes we are making will position Borders Group to compete more effectively."

Other items of interest:

• Management is no longer contemplating a sale of the company so what does that mean.....
  
• Cash flow has increase by $110mm however their ending $38mm in cash includes $94mm from the sale of discontinued ops.
• The company's AP is $12omm less than the same period last year which means they are buying less product.
• Trade creditors of $613mm exceeds the market cap of the company by 6x
• Debt, including the prior-year debt of discontinued operations, was reduced from a year ago by 34.2% or $273.1 million at the end of the third quarter to $525.4 million (see above point).
• The company's cost elimination program is expected to produce $10mm more than planned - an annual total of $70mm

More tomorrow after the conference call. After the report, their shares are off 17% but at this point that's only 30cents.

Borders and Retailing Troubles

The Bookseller is reporting that insurers have backed away from Borders. It is hard to determine how significant this is since most suppliers to Borders will have their own insurance. Terms on which suppliers are selling to Borders are very, very tight at the moment. Should Borders get into cash flow difficulties, this could have a cascading effect across the industry. The balance of on-line retailing, physical retailing and wholesale/distribution could change radically. As many have noted, the expectation is for the Christmas retailing season to be soft (or 'terrible') which will cause a number of January bankruptcy filings across all retailing. Whether book retailing is one of those remains to be seen, and we all hope not as the market changes may not be in our long term interest.

Borders Group Issues Warrants to Pershing Square Consistent with Previously Announced Agreement

From their Press Release this morning. No more details as yet regarding what this will mean for the management of the company. The implications of this must have been anticipated given the lack of success in reorganizing their assets but it remains to be seen whether Pershing Square will seek more influence than they already have. This result does place them squarely in the drivers seat regarding Borders future.

ANN ARBOR, Mich., Oct. 1 /PRNewswire-FirstCall/ -- Consistent with a previously announced agreement, Borders Group, Inc.(NYSE: BGP) today issued warrants to Pershing Square Capital Management, L.P. to purchase an additional 5.15 million shares of the company's common stock exercisable at$7.00 per share, subject to anti-dilution adjustments. The warrants are exercisable until October 9, 2014. The agreement, dated April 9, 2008, is detailed in Borders Group's 8-K filing dated April 11, 2008.

Borders 2Q Loss Improves

On their call this morning Border's management sounded far more confident and at-ease in contrast to previous calls over the past several quarters. In the current economic environment and given the rebuilding effort going on at Borders their results were encouraging. From the press release:

Borders reported results for the second quarter, ended Aug. 2, 2008 and reported a second quarter loss from continuing operations of $11.3 million or $0.19 per share, representing an improvement over the same period last year when Borders Group recorded a loss of $18.1 million or $0.31 per share.

Borders Group achieved second quarter consolidated sales from continuing operations of $749.2 million, a decrease of 6.9% over 2007. As stated, the second quarter loss from continuing operations improved to $11.3 million or $0.19 per share compared to $18.1 million or $0.31 per share a year ago. The improvement was due primarily to expense reductions, lower interest expense and a tax benefit. Excluding non-operating adjustments, the second quarter loss from continuing operations improved to $10.5 million or $0.18 per share from $12.1 million or $0.21 per share a year ago.

CEO George Jones indicated that the Borders rewards program now has 28mm members. It has been very successful and email programs have great 'open-rates' and integrating with Internet site is generating great customer response. They are becoming more sophisticated in how they use the data associated with how their rewards customers buy - they are not just sending e-mail blasts. Since July when the Internet store "really got going" they have generated $7mm in revenue. Jones also said that they are in process of implementing interactive kiosks in the stores and that these will integrate with internet site.

CFO Wilheim noted that they are "sitting in a very comfortable position" from a cash and debt perspective. Jones stated that they have significantly improved the financial position of the company with respect to both debt (balance sheet) and expense reduction. They feel very proud of what they have done and confident that at least their commitments over the next 6-12mths will not pose a problem to the operations of the company. The company has really attacked their operating expenses and also successfully reduced inventory carry by 14%. The inventory reduction was done by eliminating titles that sold 1 copy per year per store.

The results were released yesterday after the close and their share price was up 13% in after hours trading.

Speaking of Desperation

Border Stores investor William Ackerman is providing some color commentary on the Borders sale process. As a major investor in Borders (over 30%) he is trying to gin up some interest in the bizarre idea that Amazon.com should buy Borders. Is there really so little interest that this idea is posited?

Handicapping the buyers:

Private Equity buy: Pershing to take it private 1:2 Odds on Favorite

Some other PE firm: 3:1 (Pacific Equity Partners, Others)

Follett Stores: 5:1 (Borders would be a good match with Follett College and a concern for B&N/ B&N College)

BAM: 7:1 (Interesting match with BAM store locations. Combo would would be impressive)

Indigo Books & Music: 7:1 (No where to go in Canada what better opportunity will there be to become a bigger more significant player - could be the dark horse).

B&N: 33:1 (Similar odds to the winner of the Belmont so anything's possible. Probably not a real contender unless Borders goes Chapter 11 then they can renegotiate the leases).

Ingram 100:1 (Would they try this again? The environment is significantly different than 1999 but this is a long shot).

WH Smiths: 200:1. They just got out of this market so unlikely they would get back in.

Target: 200:1

Walmart: 500:1

Amazon: 1000:1 (Maybe worth a flutter).

Well that was fun...

Borders Close Sale

Five days after announcing an agreement to sell their Australian and NZ stores, Borders has annouced the deal has closed. All regulatory hurdles were overcome in the first go-around earlier this year and substantial due dilligence must also have been completed before the original deal fell apart. Press release

Borders Sell Australian Store Group

The only surprising thing about this announcement was that it was so long in coming. Borders have agreed to sell their store operations in Australia and New Zealand to Pacific Equity Partners the private equity firm and owners of Angus and Robertsons and Whitcoulls (NZ). The price paid is a disappointing $90mm in cash and deferred payments of $14mm. Earlier in the process amounts as high as $120mm were suggested and importantly this purchase price includes the rights to use the Borders brand name throughout the region.

Further details of the transaction may become clearer but to sell the branding without any long term licensing deal supporting a supplemental revenue source for Borders seems unfortunate.

There is also no comment from Borders on whether they will use the cash generated from this sale to repay the emergency financing provided by Pershing earlier this year.

AARP and Borders

Like me you you may believe that this agreement of a marketing agreement between AARP and Borders is at best bad timing based on the company's announcement of headcount reductions and the general problematic bookselling environment.

AARP and Borders(R) announced today a long-term agreement that will provide unique benefits and discounts to AARP's more than 39 million members. The nation's largest membership organization for people age 50 and over and Borders
will combine forces to expand access to information on health, financial security, travel, and other issues important to personal growth and quality of life for those over 50. In addition, Borders will offer AARP members in-store and online discounts on select merchandise and will encourage AARP members to take advantage of the benefits of membership in the Borders Rewards(R) customer loyalty program, which now has over 26 million members.

On the surface, and as a marketing agreement, this may be mutually beneficial; however, I would argue this group doesn't need too much additional motivation to buy books. Getting this group into Borders to make their purchases is not a problem unique to this segment and that's the bigger issue at the crux of Borders problems. Separate from bigger issue, whether offering membership discounts in addition to the Borders Rewards program is required to encourage this group is debatable. On the other hand, this program may compound the view that the industry is catering to the wrong market. Envision the flyers that will now populate your local Borders: won't it begin to look like the waiting room at your doctors office?

Regrettably, the marketing department also thought it a great idea to organize an essay writing contest around the idea of "Your Next Chapter". While this is clearly suggestive of a 50+ person contemplating life choices, there is the distinct possibility that any number of current or past Border's staffers will consider entering the content on behalf of the corporation.

Borders Axe Falls

Rumors were rife this weekend at BookExpo about the situation at Borders and the news was confirmed today regarding a significant headcount reduction. The company released a press statement that said in part,

As part of this expense reduction program, management reported that the company is today implementing a corporate payroll reduction that includes the elimination of 156 corporate positions spread across virtually all departments of its Ann Arbor headquarters. Employees at the company's headquarters were informed of the job eliminations this morning. In addition, Borders Group has eliminated 118 corporate posts that are based outside its headquarters, impacting primarily corporate employees in distribution centers, the field marketing organization, and the corporate sales division. These employees were informed yesterday. In total, the corporate payroll reduction eliminates approximately 20% of the company's corporate positions but less than 1% of its total workforce. The job elimination, with the exception of less than a handful of positions, is limited to corporate employees and does not involve store employees at the company's 547 Borders superstores and 475 Waldenbooks Specialty Retail stores worldwide.

Naturally, this news will only make publishers more nervous about extending credit to the company. A deal to sell the business can not come too soon.