Finally got around to reading the Borders (BGP) earnings call and the take away for me at least was very positive…
A couple of things struck me.
1- Guidance:
Despite a 2% comps sales increase number last year, guidance for the current year was in the words of CEO George Jones “very conservative”, “given the current environment”.
2- Cost cutting:
DVD “shrinkage” (read:theft) was at $20 million last year. The company has both made changes to security measures and will be reducing the number of titles sold and the expectations are for this number to fall dramatically.
Inventory ended the year at $1.3 billion and change, essentially flat over the previous year. Now, the company is moving towards a “face out” strategy on books that will reduce the number of titles sold at the store level. The results will be a dramatic fall in carried inventory at the store level. This savings drops immediately to the bottom line. The locations that have the “face out” shelving, carry 20% fewer titles yet are seeing double digits sales growth. hmmm.
The dividend was stopped (for now) and that will save $25 million and change.
3-Selective Promotions:
The Borders Rewards program now sports a membership of 25 million people. The importance of this is huge. It allows Borders to track purchases from its members and then tailor promotions to maximize the value of them. Retailers have been using these programs for years but Borders is only now getting involved. The tie in with the upcoming website launch will allow email-to-purchase marketing previously not available on this scale to the company.
4-Borders.com
The heavy costs involved with rolling out the site are done. Estimates of them were not given but looking sat the site one ought to assume they were substantial. It is important to note that in the previous year, Borders reaped no benefits from that investment. This year they will both reap the benefits and see a decrease in costs. CEO Jones said that he expects CapEX to fall from $200 million to “around” $140 million
5- Sale of assets
The minimum that will be raised in the $125 million offered by Ackman. Now, the company only has a market cap of just under $400 million at the current share price. They could conceivably by back 25% of the shares and have cash left over for operations or debt repurchases.
So where does this leave us? A cursory look shows $80 to $100 million in cost cuts available without any real effort or impediment to operations. The inventory reductions should be over an additional $100 million as the stores (not the company) begin stocking fewer titles.
Border lost $157 million last year and it looks as though it could easily cut its way to break-even or better this year now that much of heavy lifting in investment has be done. This assumes the above conservative guidance. Should that guidance prove to be conservative, results could improve even more.
Disclosure (“none” means no position):Long BGP
2 replies on “Borders Call Notes”
The only location George Jones referred too having a decrease of 20% in inventory and a double digit increase in sales was the new concept store in Ann Arbor which received a lot of media hype upon it’s opening. Was it increased traffic generated by the media or the inventory strategy that produced this bounce? Is the bounce sustainable? And with only 13 more concept stores slated to role out this year , what impact can it really have on the company anyway?
PCMI looks like the big winner in this no matter what happens. They can buy the most profitable part of Borders (Aus/NZ), they collect an impressive interest rate on the 42.5 million, and if Borders actually finds a buyer or produces a hail mary they benefit from their stock holdings. If not, then they’ve limited their losses.
dingo,
the face out is being rolled out nationally, even in this store that are not being refurbed at this time