Chain Sales Slowed In Third Quarter

Slower sales of bestsellers compounded by bad weather and distractions caused by the presidential elections limited the sales increase of the country's three largest bookstore chains to 2.6% for the third quarter ended October 31. Total revenue from Barnes & Noble, Borders Group and Books-A-Million hit $1.89 billion. The soft quarter somewhat offset the strong first half of the year, so the total sales gain for the big three for the first nine months was only 5.5%, or $5.77 billion. Looking ahead at the holidays, executives were guarded in their predictions for the season (read "Booksellers Anxious About Holiday '04 Prospects")

B&N and Borders both had total sales increases of 2.6% in the third quarter. B&N's sales from its bookstore group—consisting of superstores, Dalton and Sterling/Calendar Club, rose to $950 million. Revenue at Barnes & Noble.com fell 8%, to $91.8 million. B&N moved up the release of its third-quarter results last week to reflect the completion of the spinoff of its GameStop subsidiary; the videogame chain began trading as a separate company November 15, and B&N has no remaining stake in the retailer.

B&N's superstores had a good quarter, with sales up 4%, to $894.9 million. Comparable-store sales rose 0.9% for the period, and the company opened nine new outlets while closing three. B&N chief financial officer Joseph Lombardi noted that during the quarter, the average customer transaction was "up slightly," explaining that about one-third of the 0.9% improvement in comp sales was due to higher ticket transactions, with the remaining increase due to increased customer traffic. The closing of seven stores and a 3.3% decline in same-store sales resulted in a 19% decline in revenue at Dalton, to $35.9 million.

B&N's book sales were flat in the quarter—DVD and cafe sales were up—as an increase in sales of political books was offset by a decline in bestsellers, as well as a drop in the health and fitness category, which last year benefited from the low-carb phenomenon, Lombardi said. B&N CEO Steve Riggio added that while Unfit for Command and America (the Book) sold well in the quarter, hardcover sales were softer than in the comparable period in 2003, as publishers delayed releasing books that depend on media exposure until after the election. Lombardi said that while business picked up in the last two weeks of October, it fell again during election week. He declined to comment further on fourth-quarter trends, noting only that B&N was on track to post comp-superstore sales gains of 1% to 2% in the quarter.

The 8% decline in B&N.com sales was attributed to the slowdown in bestseller sales and to the "shedding" of several unprofitable marketing deals, executives said. Lombardi said B&N.com's goal continues to be EBITDA-positive in the fourth quarter. Riggio said B&N remains committed to bringing B&N.com "into the black"; to "significantly" increase the amount of self-published product it sells in its stores; and to open 30 to 40 new outlets annually over the next several years. He called the continuing reduction in the number of Dalton outlets "a good thing," noting that the company is evolving into a superstore retailer. There were 176 Dalton outlets at the end of the quarter.

New store openings and a strong performance by its international group offset declines in same-store sales resulting in a 2.6% increase in revenue, to $838.6 million, at Borders Group for the third quarter. Comparable-store sales at its superstores fell 1.6% in the quarter, while same-store sales at Walden fell 4.1%. Borders CEO Greg Josefowicz said sluggish store traffic—comp-store traffic was down 2%—and a slowdown in bestsellers were responsible for the drop in comp sales. In early October, Borders warned that domestic sales, hurt by hurricanes and the presidential campaign, would not meet expectations (News, Oct. 18).

At the superstores, total sales rose 2.2%, to $564.1 million, driven by new stores. Josefowicz said book sales were "basically flat" in the quarter, while sales of multimedia and cafe lagged. Fiction and children's were two of the stronger-selling segments in the period, along with political books and graphic novels. Sales were down in fitness and health and in home renovation. Sales of bestsellers were "down significantly," Josefowicz said. In multimedia, music sales, which accounted for 15% of sales, were particularly soft in the quarter, and Josefowicz said he expects music to remain challenging in the fourth quarter.

Sales at Waldenbooks fell 6.7%, to $161.5 million; the company closed two Walden outlets in the quarter. Josefowicz said the company has seen enough improvement in the Walden outlets that it has rebranded as Borders Express stores to continue the test/rollout. As part of the rebranding effort, the company is updating decorations and fixtures, keeping the focus on books, with an emphasis on "value offerings," Josefowicz said. Among the test markets are Philadelphia, Portland, Ore., and Hawaii.

International sales jumped 25.2%, to $118.6 million, led by new store openings, higher comp sales and favorable exchange rates. The segment also benefited from the purchase of the U.K. retail chain Paperchase, which was acquired in July.

Borders chief financial officer Ed Wilhelm said that the average ticket transaction was flat in the quarter. August and September had the best sales months in the period, Wilhelm said, with business weakening in October. Josefowicz said early trends in the fourth quarter are keeping the company on track to meet its expectation: that same-store sales at the superstores will be flat to down in the low single digits. Walden's same-store sales are expected to decline in the low single digits.

BAM overcame the effects of several hurricanes—three stores need to be rebuilt completely—to post a 0.6% increase in comparable-store sales. Total sales in the quarter rose 1.8%, to $104.3 million, while the net loss was $1.1 million, compared to a net loss of $800,000 last year.

BAM president Sandy Cochran said that while "there were not lots of blockbusters" in the quarter, a number of categories performed well, including teens, humor (America (The Book); He's Just Not That into You), politics (Unfit for Command; How to Talk to a Liberal), inspiration and graphic novels. The cooking and children's segments also did surprisingly well in the quarter. Cookbooks were "jump-started" by holiday titles, while movie-tie-ins helped drive growth in children's sales.

For the year to date, net sales rose 4.1%, to $326.1 million, and net income was $1.1 million, compared to a net loss of $400,000 in the same period last year.

Bookstore Chain Sales, 2003 -2004
(in millions)