B&N, Borders Coping Without Blockbusters

Executives at the nation's two largest bookstore chains touted their ability to post sales gains without a holiday blockbuster as an example of the stability of the book market. The "key takeaway" for the year, B&N CEO Steve Riggio told analysts in a conference call, was that for the second straight year the company met its financial targets without the benefit of a major holiday hit. Total sales for B&N rose 4.7% in the year, to $5.10 billion, and operating income increased 3.1%, to $251.8 million.

Borders Group CFO Ed Wilhelm said the company was "very encouraged" that it was able to post a 6% increase in comparable store sales of books at its superstores in the final quarter without a standout new release. For the full year, sales at Borders rose 3.7%, to $4.01 billion, but operating income, affected by several one-time items, fell 20%, to $173.4 million.

B&N had solid increases in the fourth quarter driven by a very strong January, which Riggio attributed in part to cashing in of gift cards and effective merchandising. Sales in the children's category, helped by Harry Potter and the Half-Blood Prince, were strong all year. And sales of B&N's Sterling Publishing unit were "terrific" in the quarter, said CFO Joe Lombardi. Increasing Sterling sales and decreasing reliance on wholesalers are two of B&N's keys to improving margins, Lombardi noted. (Sterling's sales, as well as the calendar club, comprise the "other" category, which had sales of $165 million.) The strength in the book and publishing areas helped to offset weakness in B&N's music segment, where comparable store sales were off 7%.

Music continued to be a sore spot for Borders, with comparable store sales down about 12% for the year. In books, nonfiction was much stronger than fiction in the year, especially over the holidays, when only James Patterson's new novel did exceptionally well.

Both B&N and Borders were mildly optimistic about 2006. B&N sees comparable store sales at its superstores increasing in the low single digits for the year, while Borders expects similar results for its domestic and international superstores. Same store sales at Walden are projected to decline in the low to mid single digits, giving Borders an overall sales increase of between 5% to 6%.

B&N will open 30 to 40 superstores in 2006 (including upgrades) while closing 15 to 20. Borders will open 35 domestic superstores and 10 to 15 international stores, while remodeling 100. The conversion of Walden outlets to Borders Express could slow this year. Chairman Greg Josefowicz said that while sales at converted stores were up, return on investment did not meet expectations, and the company will be "prudent" in looking at its options for Walden stores, weighing conversions, closings and maintenance. Executives expect to close more than the 50 Walden outlets it shut last year.

Longer term, Wilhelm said that this year's fourth quarter will be a key to the company's future; nearly all of its store investments will be made by that time, and Borders expects those investments to result in improved earnings in that period and in 2007. Executives had no comment when asked if there was anything new to say about reports that an equity group may be interested in acquiring the retailer.

For 2006, Riggio is looking for big things from Game of Shadows and the paperback release of The Da Vinci Code (the hardcover edition was the top fiction book at B&N in the previous week). Rachael Ray's new cookbook should also do well, Riggio said, and he expects lots of interest in two titles involving the lost gospel of Judas—Harper San Francisco's The Secrets of Judas and National Geographic's The Lost Gospel: The Quest for the Gospel of Judas Iscariot.

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The Retek Issue

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Ever since Walden and Borders merged, the two groups have been using different legacy computer systems to power their operations. As part of its effort to put the divisions on a common platform, the company began implementing a new merchandising system developed by Retek at its Walden group last summer. The installation of the system, which aims to unite buying and distribution functions, has not gone as smoothly as hoped. "We've had some challenges," Wilhelm said, "and we're working to fix them."

Wilhelm said implementation problems have not hurt sales at Walden. Still, the company has delayed installation of Retek at its superstores until "we get the system working the way we want it to," Wilhelm said. That rollout is not expected to occur this year.

Chains by Segment, 2004-05
($ in millions)