Is Borders at a Tipping Point?

Borders Group CEO George Jones used the strong revenue gains posted by the retailer in the second quarter to tout the progress the company has made to analysts in Borders's quarterly conference call. Among the signs of improvement Jones pointed to were the retailer's first positive same-store sales at Borders superstores in a year (0.4%, excluding Harry Potter and the Deathly Hallows) and flat comps at Walden—the first time in seven quarters same-store sales did not decline. Overall sales increased 10.4%, the first time quarterly sales beat B&N in more than a year.

While Jones acknowledged that Hallows played a significant role in boosting sales, he said better merchandising and improved marketing also helped lift sales. Borders has focused on “retailing basics” like effective display of key items and end caps, improved merchandise presentation and better promotions, Jones explained. Comp sales were up in the six weeks prior to Hallows going on sale, and Jones observed that the number of store transactions rose 5.5% in the quarter, with transactions up in 10 of the 13 weeks in the quarter, and had been rising before Hallows went on sale. (Borders sold 1.7 million copies of the book in the quarter.)

More effective use of the Borders Loyalty Rewards program, which now has 20 million members and adding about 150,000 members per week, also helped to build customer traffic. Various e-mail marketing tools, such as the “Short List” e-mail newsletter, have brought customers into stores, Jones said.

Walden's sales have benefited from a new organizational structure, implemented this spring, in which the division's leadership was decoupled from Borders, with Pat Wynn named v-p for the Walden group. Walden, which Jones said had been treated like a stepchild, now has a dedicated merchandising team. The culture at Walden has also been changed, Jones said, moving from an attitude where underperformance was accepted, to one of excitement about new opportunities.

Jones also called sales of Borders's first proprietary novel, Slip and Fall by Nick Santora, a success, and promised that more proprietary products are in the works, “now that we've proven we can make bestsellers our own.”

Despite the sales increase, Borders reported a bigger loss in the most recent quarter compared to a year ago, due to several one-time factors including settlement costs over California litigation involving overtime for employees, severance payments, professional fees and continued investment in the company's infrastructure, including an upgrade of its merchandising system and the installation of its new e-commerce system. CFO Ed Wilhelm said investment in systems will continue into 2008, but at a slower rate than this year. Jones noted that one of Borders's major problems has been a “deficiency” in systems, and that while the company has made improvements, “we need to be better.” An automated replenishment system is high on the priority list.

Better systems will lead to better inventory management, where Jones sees a “big opportunity” for improvement. He noted that through buying discipline, Borders moved from an overstocked inventory position at the beginning of the second quarter to being under-inventoried at the end. This was not done by “slash and burn,” he said, but was carefully thought out. Borders's objective is to improve inventory turns from 1.6 per year to 2.0, an increase that could free up $200 million in cash. (B&N's inventory turn is 2.6).

Jones said that while results are “not where they need to be,” the second-quarter performance gives him confidence that Borders will be able to deliver solid gains in 2008, when he has promised investors the changes he is implementing will begin to pay off.