At one point in its history, Waldenbooks ruled bookselling, with more than 1,200 stores generating revenue of more than $1.1 billion. By the end of 2005, those numbers had fallen: a store count of 678 and sales of $744.8 million—and, in the future of the Borders Group as envisioned by CEO George Jones, those figures will decline even more. As Jones told analysts in a conference call discussing third-quarter results, the spread of superstores and the advent of online retailers has changed the role mall stores play in the book business, but, he said, Walden's mall outlets had not responded effectively to those changes. The mall stores' mix and format are nearly the same as they were 20 years ago, Jones said, observing, "That's not logical." He said new formats and a new product mix will be tested as early as next year's first fiscal quarter. The company had tried to improve Walden's performance by converting Walden outlets to Borders Express stores, but that strategy has been suspended until the retailer gets a better handle on its downsizing plan.
While changing the mix is one way to improve Walden's results, the primary driver will be closing underperforming outlets. Borders has hired a third party to help it accelerate its store-closing program and, while the company has not disclosed how many more Walden outlets it plans to shut, CFO Ed Wilhelm said at least 80 will be closed by Jan. 31, 2007, and the number could go much higher. According to the company's 10-K filing, there are 410 Walden outlets with leases set to expire by the end of January and another 189 stores with leases that will expire in the next two years. And even where it renews leases, Jones said, those leases will likely be short-term.
Jones noted there were some bright spots in Walden's specialty operation. He was most impressed with the Borders airport stores. "I'd like to open a bunch more," Jones said, but added that competition for airport outlets is very stiff. The company's seasonal kiosk calendar business is also "very successful," he said; there are more than 700 kiosks opened for this holiday season. And there are mall stores that are "very profitable," Jones told analysts, before adding that the mall stores "can do a lot better."
The decision to aggressively downsize the mall operations was made easier by Walden's bottom-line performance. For years, Walden's cash flow had helped finance the overall Borders expansion, but in 2005 the division broke even on an EBIT (earnings before interest and taxes) basis and will lose money this year. Borders has tried to keep Walden cash-flow positive, "but we haven't been able to do it," Wilhelm conceded.
While Borders has not disclosed what it believes is the right size for Walden, if executives want to make it as small as its one-time archrival Dalton, it has a way to go. In the just completed third quarter, Dalton accounted for less than 2% of Barnes & Noble's total revenue, while the Walden group generated more than 14% of Borders's revenue.
