In a conference call with analysts that followed the release of Borders Group's year-end results (News, Mar. 17), company chairman Greg Josefowicz said that book sales in the fourth quarter were "flat to slightly down" and that the chain expects that trend to continue into the first half of 2003. Josefowicz said that book sales were hurt in the fourth quarter by weakness in the history, computer, travel and religion segments, which offset improvements in the health and diet, mystery and romance categories. Bestseller sales were also "off significantly" in the quarter, Josefowicz said, with consumers "showing less enthusiasm for brand authors than in the past."
Josefowicz said Borders is counting on the June release of Harry Potter and the Order of the Phoenix to kick-start an improvement in sales in the second half of 2003, and he is also looking for a lift from the wider implementation of category management. The practice covered 25% of the chain's business in 2002, and the company expects that level to rise to 70% by the fourth quarter. But given the uncertainty about the economy, the company is projecting total revenue to increase only by 3% for the year, although earnings growth is projected in the 5% to 12% range.
Chief financial officer Ed Wilhelm said capital expenditures in 2003 will be between $110 million and $120 million, with the bulk going to new store openings and technology upgrades. Borders will open up to 40 domestic superstores and eight international stores this year, primarily in the U.K. Josefowicz said that while Borders will maintain a consistent level of investment in its stores beyond 2003, he said that spending will begin to shift from new store openings to investment in existing stores. The investment of "strategic capital" will be used for initiatives that are expected to bring a return, such as the opening of a new category.
Borders's product mix will be changing in 2003. With the sales of music declining and sales of DVDs rising, the company has begun cutting the space allocated for music and expanding its DVD section. The multimedia category accounted for about 25% of total revenue in 2002, with music representing 16% to 18% of that figure.
While Borders will continue closing Walden outlets—50 are likely to be closed in both 2003 and 2004—Walden will add a few stores to "its small network of airport locations" this year. The company also expects sales from Walden's seasonal kiosk business to improve. Wilhelm confirmed an analyst's estimate that Walden's sales per square foot was $265 last year, compared to $245 at the superstores.
Josefowicz called 2003 "a pivotal year" for Borders's international operations. The higher net loss last year was attributed to lower than expected sales, especially in and around stores in London. New management and tighter cost controls are expected to result in significant profit improvement in the international segment, although executives stopped short of promising that the segment will finish the year in the black.
