Chain Sales up 6% in Third Quarter, to $1.5 Billion
Jim Milliot -- 11/27/00
Without Pokémon, growth slowed in quarter

Total revenues for the nation's four largest bookstore chains rose 6.3%, to $1.59 billion, for the third quarter ended October 28, 2000. All four companies--Barnes &Noble, Borders Group, Books-A-Million and Crown Books--saw sales slow in the period compared to the second quarter, when sales rose 9.5%, and two chains, BAM and Crown, had a decline in sales. The primary reason for the slowdown was the strong third quarter posted by the chains last year, led by sales of Pokémon books and merchandise. Representatives for all four booksellers said they expected a good fourth quarter.

B&N had the strongest third-quarter performance of the major chains, with sales from its bookselling group up 7.4%, to $769 million (News, Nov. 20). Sales from Borders Group (which excludes increased 6.8%, to $696.5 million. BAM's revenues, which includes sales from its Internet division, fell 1.1%, to $90.1 million (News, Nov. 20). Sales at Crown Books had the largest decline, with sales off 5%, to an estimated $40 million.

For the first nine months of the year, total revenues from the big four were up 8%, to $4.8 billion.

At Borders, total revenues for the third quarter increased 7.2%, to $703.8 million, while the chain's net loss increased to $5.0 million from $1.5 million. In its domestic operations, superstore sales rose 11.1%, to $460 million, and net income dipped to $6.5 million from $6.6 million. Comparable-store sales were up 1.3%. Company president Greg Josefowicz said the relatively small gain in same-store sales in the quarter was due to the strong performance last year driven by sales of Pokémon. The same factor contributed to a 5.4% drop in comparable-store sales at Waldenbooks. Walden's third-quarter performance, during which sales declined 5.4%, to $188 million, and net income of $800,000 fell to a loss of $1.2 million, was also hurt by a disappointing performance of its All Wound Up unit. The interactive toy kiosk operation had a loss of $2.4 million in the period and Josefowicz said the fate of the unit will be determined by its fourth-quarter performance.

Sales at jumped 78%, to $7.3 million, and the unit had a net loss of $7.3 million, up from $6.2 million. Revenues in its international division climbed 23%, to $48 million, while the net loss increased to $4 million from $2.7 million.

In a brief review of third-quarter results, Josefowicz said that he was satisfied with the performance of Borders's core businesses of books/movies/music. Certain book areas did particularly well, such as fiction, which had an 8% increase, and business books, where sales were up 25%. The rollout of Title Sleuth to about 2,000 stores also boosted special-order sales, which had solid gains in the quarter, as did gifts and accessories. In stores where Title Sleuth has been in place for some time, special-order sales account for 3% of that outlet's total revenues. Josefowicz said Borders is adding additional features to Title Sleuth, including on-the-spot buying and direct shipping to customers' homes.

Josefowicz said he was confident that Borders will have a good fourth quarter, with comp-store sales rising about 3% in superstores and 2% at Walden. Key drivers in the period will be continued benefits from Title Sleuth, a strong list of book, movie and music releases, and an
aggressive print campaign in key markets. Twelve new superstores are also planned to open in the quarter. Over the longer term, Josefowicz said he expects to see continued growth in the company's international operation and a decline in losses from its Internet division.
For the nine-month period, revenues in Borders's bookstore group rose 9%, to $2.07 billion, while sales at increased 67%, to $17.7 million. Net income from store operations fell 12%, to $6 million, while the loss at rose to $21.1 million from $18.5 million.

Crown chairman Charlie Cumello attributed the third-quarter decline to a low-single-digit drop in comparable-store sales as well as fewer stores in operation. He noted that Crown was coming off a very strong third quarter last year, driven in part by sales of Pokémon. Cumello told PW he is "comfortable" that the company will post positive same-store sales results in the fourth quarter. The company has plenty of inventory and its promotional plans are in place. "We're in much better shape than last year," Cumello said.

More B&N
In a conference call with analysts, B&N executives were optimistic about fourth-quarter prospects for the book division as well as for the entire company. Chief operating officer Alan Kahn said he expected the book group to do a "brisk" business in the current quarter led by sales of Harry Potter books and merchandise. He noted that B&N's expanded gift departments are doing well and that music sales are doing very well in stores where listening stations have been installed. Chairman Len Riggio said he expected that the company would hit its earnings projections for the fourth quarter.

Riggio was extremely bullish about prospects for the next fiscal year, especially in terms of the growth possibilities for B&N's music departments and particularly for Babbage's. Comparable-store music sales were up by double digits in the third quarter, although Riggio allowed that music revenues "had no place to go but up." He noted that B&N has never made music a priority, and while the company expects good growth from its music operations, Riggio vowed that B&N "will never be a books and music retailer," explaining that he d sn't want B&N to be known as a "non-specialist" company.

Riggio's projections for Babbage's, which had sales of $430 million for the first nine months of the year, were through the roof. He speculated that same-store sales at the video game chain will increase by 20% to 30% next year, when four new platforms are introduced and the pent-up demand for PlayStation2 is met. He repeated his belief that in three or four years the video game business will be bigger than the book industry.

The book group forecast is for double-digit revenue growth next year, driven by solid comp-store sales growth as well as new store openings. Riggio said that B&N will open 40 to 50 new superstores next year, compared to 35 this year. He said the company had intentionally kept the number of openings down to evaluate the impact of the Internet on physical bookstores and had decided that B&N "could step on the pedal a bit" in opening new outlets.

Riggio told analysts that e-commerce was helping, not hurting, sales at B&N's bricks-and-mortar stores as consumers take advantage of the different channels through which they can acquire books. Riggio said that he expects to see losses at reduced "dramatically" next year as the division cuts expenses across most categories.

Asked about print-on-demand and e-books, Riggio responded by acknowledging that while POD is rolling along, it has had only a small impact on B&N's numbers to date. He said that POD and e-book sales could increase at a 20% annual clip over the next several years, and that by 2002 or 2003, "you should see some meat on the bones." Riggio said that B&N was "well positioned" to exploit opportunities in the e-book market, but said the growth of that business will depend on when prices are brought down. He contended that publishers are keeping e-book prices high because they are afraid e-book sales will cannibalize sales of print editions, a supposition Riggio rejects. "E-book sales will be accretive," he stated.

Talking, Not Merging
Responding to a story in last week's Wall Street Journal that B&N and Gemstar were in discussions to merge their book businesses, B&N spokesperson Mary Ellen Keating said that a merger "is not something we are contemplating at all." B&N has been a stockholder of Gemstar ever since the company acquired NuvoMedia, in which B&N had a stake. Keating said that since the sale "we have had and continue to have many discussions as to how to exploit the potential" of the e-book platform, but stressed that no merger is being discussed. According to the Journal, Gemstar chairman Henry Yuen is interested in teaming with B&N to gain the booksellers' leverage over publishers to ensure a steady supply of e-book material.