Chains Call Market Most Challenging Ever

With the release of Books-A-Million's year-end results late on March 30, the nation's three major bookstore chains wrapped up 2006, a year in which total revenue rose only 2.2%, to $9.89 billion. BAM and Barnes & Noble managed to increase sales by just over 3% each, while Borders's sales rose 0.8%. Executives from all three retailers called the past year extremely challenging, and none expects competitive pressures to ease in 2007.

In his remarks to analysts tied to year-end results, B&N CEO Steve Riggio observed that the bookselling market is even more competitive than it was as recently as three years ago. The heightened competition is due in part to rivals' new loyalty programs (Borders) and improved shipping offers (Amazon), combined with slow industry growth, Riggio said. The intense competition is one reason B&N improved the discount it offers through its loyalty program last fall. "Lowering prices was the most significant decision we made last year," Riggio said, adding the company could afford to make the move given its strong financial position (among other things, B&N has no debt).

Riggio sees the higher discount to club members "as a way to lock in our best customers." He acknowledged the change will be costly, and CFO Joseph Lombardi estimated the extra discount will lower B&N's gross margin by $40 million this year.

Higher promotional discounts tied to its loyalty program, Borders Rewards, was a major contributor to lower margins at Borders in the last fiscal year, and the company's recently revised program is geared to increasing its profitability, the chain said in its 10-k filing with the Securities & Exchange Commission. In that same filing, Borders explained that its decline in net income the last two years—as well as a likely drop in 2007—was attributable to "increased competition from Internet retailers and a greater concentration on the sale of books and music by mass merchants and other non-bookstore outlets."

The filing also had a few more figures about Borders's restructuring plan. The company said the new prototype stores under development will cost about $2.4 million each: $1.2 in capital expenditures, $1 million for new inventory and $200,000 in pre-opening costs. The 124 Walden outlets that Borders closed last year had total revenue of $76 million (about $612,000 per store) and lost a combined $4.9 million.

BAM said one reason it was able to boost its earnings 35% in a "tough" fourth quarter was due to fewer price markdowns in the period and better inventory management.

Chain Sales, 2005—2006
($ in millions)