Borders Group (NYSE: BGP), which – along with its earnings report last week – suspended its dividend and announced it was considering putting itself up for sale, can probably trace most of its current difficulties to changing shopping patterns by its retail customers. When Borders, which owns and operates WaldenBooks as well as Borders bookstores, experienced more continuous prosperity several years ago as opposed to recently, consumers still did the vast majority of their shopping in person in brick-and-mortar stores. Now, each year more and more people shop on the internet, and – while this shift in retail consumption has been gradual – it has marked a sea change for book retailers.
Time was when Borders and its main rival, Barnes and Noble (NYSE: BKS) duked it out by driving out small independent bookshops and book dealers. Both Borders and Barnes and Noble built larger and larger stores, or “book superstores”; spacious modern settings with open floors, thousands of commercial titles, and seemingly everything most retail book buyers could want. Borders expanded to include a large music section and coffee shops in their superstores, yet results have been spotty the last few years. As to the direct cause of this, the internet and Amazon (NASDAQ: AMZN) come immediately to mind.
Amazon made the availability of books – if not cheaper – certainly more convenient. Need a gift for someone? While at work, order online, and get it delivered. No need for a separate trip. Also, with Amazon’s special shipping rates and its continued expanded availability of titles (not to mention everything from garden hoses to refrigerators, but that’s a completely different selling story), convenience won out over ambiance and “the book buying experience” that drove much of the brick-and-mortar appeal. So books have become, rather than a special, tangible experience for most shoppers, another commodity. And music is often downloaded, delivered in a completely different way, so Borders’ attempt to capture that market hasn’t really worked. In the book biz, score a big win for Amazon, a large loss for Borders and – up to now – perhaps a draw for Barnes and Nobles, which has more or less held its own.
As for the sobering earnings report by Borders, it earned $64.7 million in net income for the fourth quarter, or $1.10 per share. A year earlier the company had a $73.6 million loss, or -$1.25 a share. Without nonoperating and related charges, the earnings for this current fourth quarter were $1.44 per share on revenue of $1.35 billion, down slightly from $1.37 billion. The key thing to note here is that the fourth quarter includes their most profitable quarter, much of the Christmas gift-buying season. Projections for the rest of the year include losses, in this case of -49 cents and -25 cents for the next two quarters, though one must keep in mind that, in the book selling business, those kinds of estimates are not that unusual even in a profitable year.
While Barnes and Noble has continued to do better on the earnings front, these long term changes in the book buying public’s behavior (far more than gasoline prices and cyclical recessions) are the 800 pound gorillas sitting in the middle of the floor. The book selling business, as well as investors, need to notice them.
Borders has tried to outline a series of actions to strengthen its position. They are taking a $42 million cash infusion from their largest investor, Pershing Square Capital Management, headed by William Ackman, which also has the option to buy just under 20% of the company at $7 per share. Borders also said it will consider a sale of the company, and some possible suitors have been mentioned by observers: Barnes and Noble, Indigo (the Canadian book-selling giant), with a final possibility; that William Ackman’s Pershing may eventually gain a controlling stake.
There are others in the investment community who say that Borders will find still other potential suitors, while some speculate that they might not sell, and might not even survive. Borders stock briefly fell to its lowest ever, 3.97 a share, last week after the earnings report, but has since rebounded to over $6 a share. One thing is certain; the book-selling and book-buying landscape will be changed forever when this is all done.
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