Tough Read for Borders

ANN ARBOR, MI-Although total sales at Border Group Inc.’s Borders superstore units rose 4.7% in first quarter, comp store sales in the Waldenbooks segment dropped 7.3%, and net loss for the company’s international segment was $8.1 million, compared to a loss of $5.8 million for the same quarter a year ago. In all, the locally based retailer reported a net loss of $18.9 million, or 29 cents a share, for first quarter.

Noting that the loss “was at the high end of our guidance range,” during a conference call, CEO Greg Josefowicz attributed it to “a challenging sales environment, especially in the UK and at Waldenbooks stores, but also at domestic Borders superstores late in the quarter.” He said traffic was good at the US superstores until about mid-April, then slowed down. Among the reasons why is a lack of best-sellers, primarily hard-cover books.

Book sales at Borders units open for at least a year increased nearly 2%, while comp-store sales of music slid 12%. Café and gift sales showed the strongest performance during the quarter. The chain is undergoing aggressive remodeling, and comp-store sales at remodeled units are up 2.6% and “continued to trend favorably compared to the rest of the chain,” Josefowicz said.

Challenges are expected to continue into second quarter, due to difficult comparisons with the same quarter a year ago in which “Harry Potter and the Half-Blood Prince,” the sixth book in the Harry Potter series, was released. Furthermore, there will be increased costs associated with the Borders Rewards program and the opening of a new distribution center.

The Borders Rewards loyalty program recruited six million members, more than was anticipated, during first quarter. This digs into quarterly profits, because of the program’s opening discounts. However, Josefowicz said, as rewards hit their threshold, the program will have a positive impact in fourth quarter. He said fourth quarter would be a “turning point.”

“We expect to generate all of our projected earnings-per-share growth for 2006 in the fourth quarter,” he said. “We remain confident that our investment strategy is the right path for our long-term growth.” He projects consolidated earnings-per-share growth in the mid-teens, beginning in 2007.

At mid-day on May 24, following the conference call, shares of BGP were trading on the NYSE at $21.75 a share, down nearly 3.3% from the day before. The 52-week high of $26.29 a share was reached on June 3, 2005, and the 52-week low was $18.65 a share on Oct. 28, 2005.