Bookstore Chains Exceed Expectations

The success of Bill Clinton's My Life helped the nation's three largest bookstore chains perform better than expected in the second quarter ended July 31. The three chains—Barnes & Noble, Borders Group and Books-A-Million—had all warned that results in the second quarter could be down compared to last year's second period, when Harry Potter and the Order of the Phoenixwas released. Sales for the three chains rose 3% in the quarter, to just under $2 billion. Revenue for the first half of the year increased 6.9%, to $3.9 billion.

B&N's bookstore group had the largest gain in the quarter, with sales up 3.9%, to $1.01 billion. Operating profit for the bookstore segment rose to $36 million from $25 million. Company chairman Steve Riggio told analysts in a conference call he was "pleased" that B&N had exceeded budget. Comparable-store sales at its superstores rose 1.4% in the period, considerably better than the 2%—3% decline the company had expected. Total sales at the superstores rose 5%, to $961.3 million.

Riggio attributed the gains to continued strong sales of hardcover bestsellers, particularly in hardcover, offsetting a decline in sales of children's books. My Life was the top seller in the quarter; B&N sold more than 250,000 copies in the book's first week. Other strong sellers included Big Russ and Me, Plan of Attack and Alexander Hamilton, while fiction sales were led by The Da Vinci Code, Rule of Four and Skinny Dip. Riggio added that comp sales were positive for all store segments, including cafe and music.

Sales at Dalton fell 22% in the quarter, to $39.9 million, due to a 6.8% decrease in same-store revenue, plus store closings.

Sterling added about $14 million to sales in the period.

Given the stronger than expected second quarter, B&N raised its earnings estimate for the full year and said it expects comp-store sales at its superstores to increase 3% for 2004. The company predicted that comp-store sales for the last six months will increase 1% to 2%. Riggio explained that despite a number of new political books that he expects to sell well this year, B&N still expects sales gains to be tempered by distractions caused by the Olympics and the presidential election.

Riggio used the conference call to again tout the benefits that accrue to B&N from its self-publishing program. He said that with mass merchandisers selling bestsellers as loss leaders and the growing used-book problem, self-publishing is the best way "to put a moat around our business. There is no better way to differentiate yourself from competitors than by offering product that competitors don't have." During the second quarter, sales of B&N's classics hit record levels, driven in part by B&N's "buy two, get one free" promotion. Sales of exclusive Spider-Man books did well and Riggio said B&N has a "growing relationship" with Spider-Man producer Marvel. B&N's Breaking the Da Vinci Code has sold "tens of thousands of copies," and Riggio said he expects it to continue to sell well at least until the movie is released next year. He also predicted that Sterling's new Hippy title would be among the top sellers at the chain in the second half of the year. Riggio said that while B&N's publishing program will remain focused on publishing risk-averse titles, it is planning a few new titles this fall that will be more dependent on publicity than its usual books.

Borders Sales up 2%

Total revenue at Borders rose 2.3% in the quarter, to $853.4 million, and net income increased to $8.5 million from $4.5 million. Borders chairman Greg Josefowicz said he was "satisfied" with the performance, given the difficult comparisons with last year's comparable quarter.

Book sales were the key to improving results in the period, Josefowicz said, particularly at the company's superstores, where comparable-store sales fell 0.8%; the company had forecast a low to mid-single decline in comp-store sales in the period for its superstores. Josefowicz noted that excluding Potter, book sales would have risen 2%—3% on a same-store basis, which he said "illustrates the strength of our book business." In addition to My Life, the political, general fiction and mystery and suspense segments had solid gains in the period, while the sales momentum of the diet and fitness segment cooled a bit. Total revenue for the superstores increased 4% in the quarter, to $592.8 million. The increase in book sales was complemented by a strong gain in sales of DVDs, while music sales declined.

Sales at Waldenbooks dropped 10.7%, to $150 million, due to a 7.3% decline in comparable-store sales plus store closings. Walden was especially hard hit by the Pottercomparison; excluding Potter,comp sales were down 1%.

Sales in Borders's international group rose 18.3%, to $104.3 million, driven by new store growth, comp-store sales increases and favorable exchange rates. Excluding currency translations, sales were up 7.9%.

Josefowicz credited Borders's renewed focus on books for strengthening sales in the segment. He said Borders's promotional efforts have been targeted toward getting customers to make multiple purchases of books. The promotions have resulted in higher transactions per customer, Josefowicz said, telling analysts in a conference call that the company's "sales challenge remains getting traffic into the stores."

Josefowicz said he was hopeful that Borders new licensing agreement with Seattle's Best Coffee to assume operating the company's cafes will drive more people into stores. Under the agreement, SBC, which is a division of Starbucks, will train the cafe staff, although the cafes will continue to be managed and operated by Borders's personnel.

Although Borders slightly raised its earnings forecast for the full year, executives remained "appropriately conservative" in looking at sales growth for the second half of the year. Josefowicz and Borders CFO Ed Wilhelm cited the distractions caused by the Olympics, Hurricane Charley and "music challenges" as reasons for their conservative approach. Continuing buzz about political books should mean solid sales in that category at least through the election, executives said. Total company sales for the first half of 2004 rose 6.1%, to $1.69 billion, and the company had net income of $11.5 million, compared to a $300,000 net loss in last year's first half.

Asked about its domestic plans for the recently acquired U.K. retailer Paperchase, Josefowicz said the immediate aim is to move more of its products into U.S. stores. Longer term, Josefowicz said, it is likely that the chain will look for locations to test the Paperchase concept.

Sales at BAM rose 0.9% in the second quarter, to $114.1 million, while net income fell to $1 million from $1.4 million. Results were "significantly better" than expected, said president Sandy Cochran. The biography category, led by My Life, did very well in the quarter, and fiction remained very strong. The resetting of BAM's teen section helped spur gains in that segment, and sales also benefited from a companywide promotion. BAM opened one superstore in the period and closed one Bookland, and is on track to open four to six outlets this year.

Executives were optimistic about the remainder of the year, although sales early in the third quarter were hurt by Hurricane Charley, which forced BAM to close about 20 stores for part of last weekend. Political titles are expected to continue to sell well up through the election, while fourth-quarter sales should be helped by good fiction and cookbook lists; tie-ins to the Polar Expressand Lemony Snicket movies should be among the top sellers in the children's segment, Cochran said.

For the first half of 2004, sales were up 5.2%, to $222.6 million, and the company had net income of $2.2 million, compared to earnings of $319,000 in last year's first six-month period. The stronger than expected results and positive outlook for the balance of the year prompted BAM to increase its earnings-per-share guidance for the full year from 52 cents—54 cents to 57 cents—59 cents.

BAM also announced that it will begin paying a quarterly dividend of three cents per share beginning September 14. A special one-time dividend of 12 cents per share will also be issued next month.

Quarterly Sales at the Largest Bookstore Chains

(in millions)