Borders (Lack of) Strategic Plan

The WSJ took a look at Borders today but not in any great analytical sense (subscription required). There is much to think about from the perspective of shareholders but this perspective seems to be missing from the discussion thus far. Perhaps some of the analysts that follow the company are preparing their position reports. The Journal did allude to the possibility that Borders could be a PE target: I would wonder about that although they believe this seems to be buoying the stock. In my opinion given the newish management, I think any Banker would want to see some improvement before they jumped in. Over the past six months there have been precious few positive actions out of the company but only a few people seem to be concerned about the long timetable to improvement.

My post from earlier this week.

Here were some other blog posts:
The Publishing Contrarian
Booksquare

The Road - Cormac McCarthy. An Oprah Pick

Oprah announced an unusual choice for her Book Selection today. Cormac McCarthy's The Road which I read in November is a frightening book and I recommend it. Here is my take.

If you saw the movies 21 days or Omega Man or Plant of the Apes you will know that in the post apocalyptic world we will be separated into two classes. Those that remain human and those that have become something terribly mutated. So it goes with The Road by Cormac McCarthy.

The book is immediately powerful because the reader sees this post-Armageddon future as entirely likely and the ravages forced on society as absolutely plausible. There are two characters in the book - father and son - and so depraved are the antagonists that the father concentrates on retaining one remaining bullet for his gun so he can shoot his son should they be captured. He cannot let the son become victim to a certain end that is revealed episodically until a climatic moment near the middle of the book. As they stumble along the road in a daily struggle for food the possible future is horrifyingly recounted when they nearly interrupt a cannibals smorgasbord replete with cauldron in the yard.

The book depicts a greyed out world where nothing apparently grows, all structures have been stripped by some locust of human desperation and death is found everywhere even in the tarmac of the the road they are travelling. It is not entirely clear where they are travelling or what has lead them to make this journey - there are several explanations which adds to the mystery. The book is riveting and is a stylized conversation between father and son which flows fast and sure. The Road, which I read in two days will live in my mind for a long time, but as horrific as this story is, I am sure the real thing will be worse and that is saying something.

Metadata, identifiers and a challenge ahead ….

Another rehash from March 28, 2007 this time a post written by Michael Healy who at the time was the Executive Director of the Book Industry Study Group. Michael has since moved on to Copyright Clearance Center but all of these issues he spoke about in 2007 remain relevant.

I am (unsurprisingly) in complete agreement with Michael’s comment in his thought-provoking piece on metadata that publishing businesses “must continue to focus on product information”. No one would seriously argue with his assertion that the quality of metadata has risen in recent years.

Several factors have influenced the improvements we have seen. International standards, notably ONIX, have been helpful to this process and many publishers, booksellers and data aggregators have adopted it to organize and communicate information in a standardized way. Practical guidance has also been made available. The Book Industry Study Group has prepared Product Metadata Best Practices, a set of voluntary guidelines that aims to help publishers improve the quality of their product information throughout the supply chain and speed the delivery of that information to the vendors’ trading partners. Innovative services from companies like Quality Solutions and Netread have also played their part.

I think also the general level of awareness in the book industry of the role product information plays in selling books has risen substantially. This has been helped by leaders like David Young at Hachette, Joe Gonnella at Barnes & Noble, and many others evangelizing on the subject for many years.

Under normal circumstances when improvements like those we have seen are made there is a danger of complacency setting in, but I see encouraging signs that this is being avoided. In many of the larger publishing houses, where investment in quality metadata has already been significant, I find abundant evidence of a commitment to raise standards even further. Many examples of high-quality data can be found outside these large houses, but I think it remains true that many smaller companies, working with fewer resources, have a lot to do raise their game. Organizations like BISG must face the challenge of how to reach these companies with clear, straightforward advice and with tools to help them deliver good metadata. We will be announcing some initiatives in this area shortly.

More work is certainly needed in the standards area and much of this is underway. A new release of ONIX is expected later this year which, among other things, will improve its handling of digital publications. An entirely new standard now under development, the International Standard Party Identifier (ISPI), will in time establish a unique identifier for authors, composers, performers and others in the creative supply chain. We are all aware of how unreliable personal names are as a means of identifying individuals, especially when we consider how many people share the same name and how many authors use pseudonyms. The adoption of a standard ID for personal and corporate names will be a big step in eliminating ambiguity when searching and in facilitating transactions such as the remittance of royalties.

RFID also appears to offer interesting opportunities. As the price of tags continues to fall we are beginning to see some large-scale adoptions in libraries, notwithstanding well-documented concerns about privacy issues. In bookselling, at least so far, the response has been more cautious. The adoption of RFID by the leading Dutch bookshop chain, BGN, has certainly stimulated interest among American booksellers but at the moment most of them appear to be waiting for more compelling cost benefits to emerge.

As we look further ahead into a future in which more fragmented content is sold, distributed and traded digitally, whether it’s cookery recipes or individual chapters from textbooks, one key question is how the industry will cope with the metadata challenge. If publishers are finding it demanding today to provide comprehensive, accurate and timely product information to support a universe of more than 3.0 million US titles and 200,000 new books a year, what happens in a market where available product is set to grow exponentially?

Michael can be reached directly at CCC.


Links: Metadata: What does it all mean

Thomson Learning Sale Update

The Globe and Mail (Toronto) is naming the names of those who are bidding for Thomson Learning. No real surprises and it would appear that the only operator that may emerge as a potential party to an acquisition is Bertelsmann. The only reason for that would be the announcement last week of Bertelsmann's establishment of a private equity fund. Perhaps if that announcement had not been made this list would be exclusively PE. Those named in the article are Bain, Thomas Lee, Blackstone, Warburg and Apax. Pretty much the top of the pile.

According to the article the dd meetings are underway and a deal is expected in the next two months. It seems likely that the Reed/Harcourt divestiture timetable may be set back into the third quarter due to this activity. Now that the WK education deal is done activity and attention will move to Thomson so look for more articles.

Globe & Mail

Wolters Kluwer Education Sale Confirmed

WK confirmed the sale of its education unit to Private Equity fund Bridgeport Capital for $1.0billion. As mentioned last week this represents a good price and WK, Reed and Thomson Learning should all be happy with the valuation.

Reuters

Englishman in New York

One of the great things about living in New York (technically, I live 1.5miles to the west) is that you can find just about anything and if you work it right you can live in a neighborhood or interact completely with people from your own land. In my case, there are numerous opportunities to bond with fellow English (or Greater England) in bars and stores in lower Manhattan. On Saturday afternoon, I visited my favorite corner shop for a few pork pies, sausage rolls and some bangers. As a quite considerably displaced English person (via Thailand, New Zealand, Australia and Hawaii), I can still remember the first time I walked into Myers of Keswick. (This is not a good picture). I almost expected Ronnie Corbett to to be standing behind the counter. (Thankfully the shop assistants are considerably better looking). At Myers, you can find everything from Flake and Crunchie bars to Ribena to Branston Pickle all of which are favorites of mine. A side effect of the limitation on traveling with liquids has been a significant reduction of my direct importation so I am lucky to have Myers.

At the store, I also found out for the first time that a number of local West Village stores are attempting to designate the area bordered by W14th, Greenwich Avenue and W10th as “Little Britain”. The campaign was undertaken by Tea and Sympathy (a tea shop) and is also supported by Virgin who bring loads of us back and forwards from the UK. There does seem to be some support for the idea. If you navigate to the ‘map’ segment on the web site you will find all the local ‘little Britain’ attractions. Highlights are Myers, A Salt and Battery and The Spotted Pig.

Following my shopping visit to Myers, I wandered around the west village neighborhood and at one point joined a crowd outside a full pub named The Red Bull where the group were watching South Africa attempt to match the incredible 40 over total of Australia (377 and they won). Standing outside in a group of about 20 were people from England, South Africa and New Zealand all joined by their interest in Cricket. At the same time on a TV screen further inside the bar England were dismally performing something closely resembling football. I love New York.

Krakoff Dies

From PaidContent.org: Bob Krakoff died suddenly last night at the age of 72. Krakoff, had recently taken over the VNU business media properties in the wake of the Nielsen privatisation. In his sucessful media career, Krakoff ran many of the Reed Business magazines and reference companies and rose to vice-chairman at RE.

Paidcontent.org.

Harlequin: An Augmented Man Is Good to Find

If you happen to be in Toronto this weekend and you are male you may want to try out for the open 'casting call' to be a cover model. Apparently, they are having difficulty finding the right sort of bloke and are going to look beyond the typical modeling agency fodder and take walk-ins. The modelling agency hurdle had always been my biggest obstacle but sadly I am not able to make it to Canada this weekend. Regardless, the rather sizable 'alternate lifestyle' community of Toronto should have some fun with this one. From The National Post:

"Ms. Reynolds also said Harlequin, which typically relies on a male protagonist of chiselled physique for its titles such as Slow Hand Luke and Jack & Jilted, is often looking for more muscular models that her agency typically wouldn't carry. "It's difficult because we only have a limited pool of guys who might be able to--even if they're slightly augmented -- look right. It's easier for us to provide the James Bond guy or the New York, sophisticated-businessman guy."

"Peter Duck, a professor in Ryerson University's School of Fashion, said he was not surprised to learn Harlequin is facing a shortage of manly models, given trends in the fashion industry. "The agencies, I'm sure they're getting this look that's been popular for the last few years, which is very skinny, tall and young."

I swear that was the first cover I came across.

Pearson Teams With Google

Educational publisher Pearson has linked up with Google Video to offer students quick video programs of educational programs.

Lecture and Test Prep videos for seven additional Martin-Gay titles from Pearson Prentice Hall will be available for download by summer 2007, covering basic college mathematics, introductory algebra, and, intermediate algebra. Students can purchase sections of the Lecture Videos for $0.99 each; a chapter of the Test Prep videos for $1.99; and a full chapter of the Lecture Videos for $3.99.

The quick video content is designed to support in class and text material and a 'great way to get extra support'. Parents may anti-up for the videos but I wonder whether the kids will. How soon will the videos be available for free on YouTube? You do have to recognize that Pearson comes up with these interesting ideas to extend content into different distribution channels and to go where the customers are.

Also, it being Friday and there being excitment over Wolters Kluwer, the Pearson plc stock is up (again) this morning on speculation of a break-up.

Wolters Kluwer in Divestiture Talks

According to (Dutch) BNR newsradio Wolters Kluwer has entered into exclusive talks with investment fund Bridgepoint for the sale of its Education unit. This would seem to confirm that the front runner Pearson is not in the running to acquire this business. Speculators commented that the price PE were willing to pay was simply too much for Pearson. Bridgepoint have invested in media in the past but nothing this large; there other investments span industries.

The IHT is also reporting that the unit will be sold for as much as €775million. First out of the gate with a sale agreement, this sales price sets a high mark that may lead to high sales values for Thomson Learning and Harcourt.

Reuters

Bertelsmann Speculation (Deuce)

No sooner was the press conference over that announced the launch of an equity fund than speculation resumed over an purchase of Thomson Learning by Bertelsmann. No news from the company naturally. Reuters. Stay tuned.

Fund
Speculation

Barnes and Noble Report Full Year

Barnes and Noble announced their full year results this morning and in the previous press release providing full year guidance the company indicated they would be at the lower end of the EPS range of $2.20-2.30. They are coming in at $2.18 and the market will not be too happy with that performance.

Here is the press release
Here is a financial chart reflecting their performance
Here is my prior post on this subject
Here is a webcast

Borders Reports Their Strategic Plan

Is there room for another book retail website? Borders believes there is and has announced that they will reopen the web bookstore. Strategically, this is the best move; however, operationally this is going to pose tremendous challenges for Borders and I am not sure they can pull it off. The lesson in the B&N approach to the web is that it can be an effective customer retention and customer service tool and they have achieved a successful integration with the stores. The flip side of that is if B&N had screwed up on the web then it could/may have screwed up the store business which is the risk Borders will face. Let's face it, there is little that the company will be able to achieve that is new and revolutionary in placing a bookstore on the web, so their real task has to be in building customer retention and extending the community of Borders customers beyond the stores. In other words, if they are going at this to compete with Amazon to build a real 'destination' book retail site they will loose out and in the process loose a lot of money in the process.

Management at Borders is also an issue and has been over the past ten years or so. New management is installed and the announcement of the web site is a representation of the new regimes strategic plan for the next several years. There have been several regimes installed in recent years with grand plans (category management anyone?) but while the ideas had merit the execution left something to be desired. Building a new web presence is not something that they can do on the cheap which means they are going to have to have the right people in place to get the job done. If it were me, I would take the entire web initiative out of Ann Arbor and set it up from scratch in India. There is just too much baggage in the home office.

Enough editorializing.

Elements of the announced strategic plan are as follows from the press release:

Revitalizing the domestic Borders superstore business to achieve, by 2009:

• Consolidated EBIT margins of 5% to 6% compared to 1.8% in 2006, driven by sustained same-store sales growth in the low- to mid-single digits at domestic superstores.
• Improved inventory turns of 2 times compared to 1.6 times in 2006.
• Refocusing investments toward transforming domestic superstores while significantly reducing investment in segments that have not provided a satisfactory return, including the International segment and Waldenbooks

Specialty Retail segment.

• The company will explore strategic alternatives for the majority of its International segment, including its U.K., Ireland, Australia and New Zealand superstores and Books etc. business, and will look toward its successful franchise model for future international expansion in new markets.
• Highly aggressive efforts, which began in the fourth quarter of 2006, to right-size the Waldenbooks Specialty Retail segment will continue in 2007 with the goal of reducing the number of Waldenbooks stores from 564 at the close of 2006 to approximately 300 by the end of 2008.
• Reinventing the company by leveraging innovation, technology and strategic alliances to differentiate Borders in the marketplace, including the debut of a new proprietary e-commerce site in early 2008

It is a fairly long press release - although one should expect that given it is supposed to spell out the company's strategy - and they go on to explain how they will revitalize the Borders stores and merchandising, continue to invest in Seattle's Best Coffee and Paperchase. (Is there a future as a combo WH Smiths and B&N me thinks...). The company will also continue to invest in the Borders rewards program (which in the case of B&N, they blame on decreased operating margins for the upcoming six-nine months) which has 17 million members. The company will halt capital improvements to their stores until they are able to prove out their new 'store concept' which they expect to be completed in the second half of this year. Lastly, the company will expand its publishing program. About the only thing they are doing that doesn't appear to mimic B&N is invest internationally. (Suggestions that they were changing their corporate colors from red to green and beige are untrue and mean).

In discussing the web site the company says the following:

As part of the development of Borders.com, the company is consolidating its Web properties into a single infrastructure. This will facilitate a seamless cross-channel experience that will integrate the in-store and on line experiences. The addition of new "Digital Centers" in Borders stores will enable customers to learn about, interact with, and purchase new digital products-- such as audio books, e-books, MP3 players -- and services such as down loading and personal publishing that complement the Borders brand. The company is in the process of exploring several potential arrangements for key partnerships with respect to its digital offerings. The digital services can be made available both in-store and online as a result of the Web initiative.

Lastly in signing off the CEO George Jones is quoted as follows:

"We need to reinvent our business to exploit the rapid changes taking place in how consumers access information and entertainment," Jones said."Our ultimate goal is to make Borders a vital community gathering place where people come together to see, touch, interact, and learn -- online and in- store."

Gosh, that about sums it up. Good luck with that.

Borders Full Year Results

Any new manager wants to clean house and start from scratch which may be the tactic the CEO George Jones is adopting with the "disappointing" Borders full year results. The worse the starting point the better the future comparison - assuming the strategy works.

From the press release this morning:

The company recorded a consolidated loss in the fourth quarter of $1.25 per share, which compares to consolidated earnings per share of $1.78 for the same period in 2005. For the full year, on a GAAP basis, Borders Group posted a consolidated loss of $2.44 per share compared to consolidated diluted earnings per share of $1.42 for the prior year. Excluding non-operating charges, primarily comprised of asset write-offs, the company recorded consolidated diluted earnings per share of $1.61 for the fourth quarter, which compares to operating consolidated earnings per share of $1.87 one year ago. For the full year, on an operating basis, Borders Group posted consolidated earnings per share of $0.39 compared to $1.57 consolidated earnings per share in 2005.

Most of the EPS loss is attributed to asset impairment related to the UK operations (although they don't discuss exactly what the reasoning is here) but even without the write-downs which were probably necessary the full year operating results versus a mediocre last year are pretty dire.

Full year results were announced as follows:

• For the full year 2006, consolidated sales increased by 0.8% to $4.06 billion.
• The company recorded a net loss of $151.3 million in 2006 compared to net income of $101.0 million in 2005 on a GAAP basis.
• Excluding non-operating charges, net income decreased by 78.3% from $112.0 million in 2005 to $24.3 million in 2006.
• Borders stores comparable store sales in the segment decreased by 2.8% in the fourth quarter and declined by 2.2% for the full year.
• International segment comparable superstore sales increased by 0.3% for the fourth quarter and decreased by 0.4% for the year in local currency
• Walden comparable store sales in the segment decreased by 6.2% in the fourth quarter and declined by 7.5% for the full year.
  

Press release

Scholastic Earnings

A big day for earnings reports today and first up is Scholastic which is reporting 3rd Quarter results today. They have narrowed their loss versus the same period last year but they are cutting their full year outlook. Watch the stock price later in the day. The company's year ends in May and the last Harry Potter book is due in July. (Reuters)

Here is the full press release and an excerpt:

Results in the third quarter were generally positive. Strong sales in the core clubs and improved efficiencies sustained an impressive profit turnaround in School Book Clubs and drove higher margins in the Children's Book Publishing and Distribution segment. Robust technology sales also improved results and margins in Educational Publishing. In addition, the Company's cost reduction efforts remained on plan," commented Richard Robinson, Chairman, CEO and President. "While customer acquisition through the Internet remained strong in Continuities, higher bad debt and promotion amortization hurt the quarter's results and have caused us to reduce our outlook for the fourth quarter and full year.

Results for the quarter:

• Company now expects full year earnings in the range of $1.40 to $1.60 per diluted share on revenues of $2.1 to $2.2 billion
• Free cash flow for the fiscal year is now expected to be between $50 and $70 million
• Childrens segment revenues in the third quarter of fiscal 2007 were $280.1 million, up 3% from $270.9 million in the prior year period
• Educational segment revenue increased slightly to $74.6 million from $73.5 million in the prior year period, and operating results improved to a loss of $3.0 million from a loss of $3.5 million in the year-ago period.
• International segment revenue rose 5% (or 1% in local currencies) to $101.5 million from $96.9 million in the prior year period and operating profit improved to $3.5 million from $2.3 million a year ago, primarily as a result of higher export profits.
• Media, Licensing and Advertising revenue in the segment declined 12% to $40.8 million from $46.4 million in the prior year period.
• Corporate Overhead declined 20% to $15.7 million from $19.7 million in the prior year period.

Blurb.com

As readers should know, I have had great experience with Blurb.com's digitial publishing 'program.' The fees are so cheap that I encourage anyone interested to give the application a try. Today they are covered in USA Today. And here is an excerpt:

Blurb now has fans among architects, real estate agents, photographers, cookbook authors, museum archivists and others who have used it to print bookstore-quality editions. It takes orders for thousands of books daily, up from hundreds just a few months ago.A basic hardcover Blurb book is adorned with a full-color, glossy dust cover that looks like it belongs in a bookstore, not on a standard $29.95 homemade project. "We live and die on … quality," says Gittins. "That's what's really gotten people's attention."

Most Blurb customers (Gittins calls them Blurbarians) order books of 100 to 120 pages, and the cost is $37.95. A similar book from Shutterfly or the Kodak EasyShare Gallery would cost upwards of $100. Gittins says Blurb makes money
on every book, and can afford the lower prices thanks to automation.Blurb's Booksmart software is a free, fully functional layout program. Designing your book — if you are so inspired — can take many hours. But once it's finished and uploaded to Blurb, there's very little human interaction. "We're the cleanest business (that) printing has ever seen," Gittins says. "There are no proofs, just finished books."

Proquest Suspended

In a press release this afternoon, Proquest advised investors that trading in their shares had been suspended by the NYSE due to their failure to submit various regulatory filings.

The NYSE is suspending trading because the Company now anticipates it will not file its Annual Report on Form 10-K for fiscal year2005 (2005 10-K) with the Securities and Exchange Commission (SEC) by April2, 2007 and is therefore not in compliance with NYSE Rule 802.01E. The NYSE stated that an application to the SEC to delist the Company's shares from the NYSE is pending the completion of applicable procedures.

The company is obscure about when it will be in compliance indicating it will be sometime in the second quarter.

Proquest Guidance

Bertelsmann Teaming with Private Equity

The FT (via MSN) is reporting that Bertelsmann, the owner of Random House and RTL, is teaming up with private equity groups to create a €1billion fund for investments in "opportunities of significant scale" in media related businesses. Bertelsmann will initially contribute €500m. From the article,

Bertelsmann said the initiative would allow it to take minority stakes in businesses and decide after three to five years, when its partners are seeking an exit, whether to take full control. The initiative comes just 10 months after the Mohn family, which controls the group, engineered the buyout of Groupe Bruxelles Lambert, its only external shareholder. The deal increased Bertelsmann's debt by €4.5bn to €6.8bn and lowered expectations that one of Europe's most conservative media groups would be able to take on any large deals in the short term.

Analysts also state that the low cost of capital and the readily available funds that PE has access to poses a significant advantage for the banks versus operators. (This may be the case with Wolters Klewer Education). In this case they suggest that the fund would easily finance acquisitions up to five times the funds value. Clearly this is a shrewd move by Bertelsmann. Rather than watch PE pick-up some potentially prize assets out of sheer financial muscle they are choosing to join in with the bankers and see how it plays out.

Wolters Kluwer Education

Reuters are reporting that Pearson may not be one of the final two parties negotiating to buy the WK educational assets. Apparently, the price greater than 700mm euros has eliminated them from consideration. All conjecture of course until the deal is announced which is expected by the end of the week.

Sunny in New York

We had some snow this weekend but it has cleared up and despite a cold breeze it was a beautiful day yesterday. This is the location where a scene from On The Waterfront with Marlon Brando was filmed - just over by the green fence.