Sales Rise 10% at Borders; Earnings Dip

Total revenues at Borders Group rose 10.2%, to $3.27 billion, in the fiscal year ended January 28, 2001. Store sales were up 9.9%, to $3.24 billion, while sales at Borders.com jumped 53.1%, to $27.4 million. Within the store group, revenues at Borders's international operations increased 30.4%, to $219.2 million, while sales at Borders's superstores rose 14.1%, to $2.08 billion. Sales at Waldenbooks fell 1.6%, to $944.3 million.

Despite the increase in revenues, net income from continuing operations dipped to $96.8 million from $97.4 million in fiscal 2000, while net income, including one-time charges and discontinued operations, sank to $43.6 million from $90.3 million. Borders took a $19.4-million charge in connection with disposing of its All Wound Up unit and a $23-million charge related to the write-down of certain assets of Borders.com and Waldenbooks. During fiscal 2001, Borders.com had a loss of $18.4 million, compared to $17.2 million in fiscal 2000.

In a conference call with analysts, Borders executives reiterated their promise to "mitigate the losses" in Borders.com's consumer business. Believing that there is little chance that the consumer portion of Borders.com will turn a profit anytime soon, the company will put most of its Internet resources this year behind its in-store programs, such as Title Sleuth. According to Borders, Title Sleuth generates 800,000 searches per week and helped drive up special-order sales in the year; special orders represented 3% of total revenues in fiscal 2001. Borders also plans to integrate the results of Borders.com into the superstore division this year.

Superstore earnings are expected to be up "in the teens" this year, said Ed Wilhelm, Borders's chief financial officer. The company will open 25 to 30 new superstores and is looking for comparable store sales to rise 3% to 4%. Wilhelm said profits at Walden will fall again in fiscal 2002, although at a slower rate than last year. The company will close about 40 Walden outlets, a move expected to keep payroll costs at last year's level. Capital expenditures at Walden will be reduced to between $12 million and $13 million this year, from more than $25 million last year. Wilhelm said the retailer's international group is now "on the road to profitability." Losses are forecast to be cut by 20% this year, and Wilhelm said he is looking forward to the international group delivering "ongoing profitability."

Looking past fiscal 2002, Wilhelm said he expects that the company will open between 40 and 50 superstores in fiscal 2003, while the rate of Walden closures will slow.

In response to questions, executives reported that legal costs associated with the American Booksellers Association lawsuit topped $5 million in last year's fourth quarter, but that the company expects costs to decline as the case goes to trial next month. Executives also said that in the current year, chairman Bob DiRomualdo and vice-chairman George Mrkonic, who work part-time on Borders business, will not be among the five highest paid employees at the company. The change was made in response to a proposal by a shareholder that called for the highest paid employees to be full-time.

Deal with Ingram

To help reduce losses at Borders.com and to improve the efficiency of its special order operations, Borders has reached an agreement with Ingram under which the wholesaler will take over fulfillment for Borders's online and special-order sales. As part of the agreement, Borders will sell a "large percentage" of its book inventory in its La Vergne, Tenn., fulfillment center to Ingram, which will move the products to its own warehouse. The transition is expected to be concluded in the second quarter, and the company will take a one-time charge of $15 million to $20 million.

The Borders facility, which also houses multimedia and gift and stationery product, will remain open as the retailer realigns its distribution operations. Employees working at the affected facility will be given new jobs or offered positions at other Borders operations in La Vergne.

Borders Group Inc. Revenues, 2000-2001 ($ in millions)