The extensive reorganization plan outlined by Borders Group CEO George Jones last week includes all the steps necessary to revive the operating performance of the nation's second largest bookstore chain. Although the stock market had little immediate reaction to the restructuring plans, several analysts said the decision to focus Borders's efforts on its domestic superstores was the right one, as was its intention to take control of its online retailing business. Modifications in the Borders loyalty program, Borders Rewards, was also seen as a positive step.

To enable it to shift its resources to its domestic superstores, Borders will close 250 Waldenbook outlets over the next two years, bringing the number down to 300, a figure that CFO Ed Wilhelm believes can ensure a profitable business. In addition to downsizing the number of Walden mall stores, Borders will change the product mix in the remaining outlets and upgrade merchandising. The company will also add a few airport stores and plans to open several standalone Paperchase outlets that will emphasize stationery and related items. Borders has hired Merrill Lynch to try to sell its superstore businesses in the U.K. and Ireland, as well as the U.K's Books etc. chain, while KPMG has been engaged to dispose of Borders's New Zealand and Australia stores. Borders is keeping its Singapore store, which will serve as the headquarters for its franchise operation, which currently includes stores in the UAE and Malaysia. While the international business has grown, it never achieved its return-on-investment objectives, Jones said.

Downsizing is only one part of Borders's strategy, Jones made clear, emphasizing that he sees lots of opportunity to grow its superstore business. "We can't always play defense. We have to go on the offense," Jones said. To that end, Borders is developing a new concept store that will include "destination businesses" in certain lifestyle categories as well as new technology features. Borders is developing digital centers that will allow customers to buy audio products, e-books and devices and is working with partners to develop a personal publishing program. As part of its plan to assume operating its online business, Borders will establish kiosks where customers can order out-of-stock inventory that can be shipped directly to them in two days.

Some of those elements will be put into existing superstores this year. The first prototype store is set to open in early 2008, and Borders plans to open 12 to 15 new concept stores in the year. While the concept store is in development this year, Borders hopes to improve sales at its superstores by working on such fundamentals as promoting key items, improving endcap displays and better executing merchandising and marketing plans across the entire chain. Borders will also "carefully trim" the inventory in its superstores. While the company knows its customers expect to find a breadth of titles at its stores, Jones said Borders can improve the available selection.

A key part of its overall strategy is to improve Borders's communication with publishers, starting with the major New York houses. The retailer has revived the practice of having buyers travel to Manhattan to discuss new titles and marketing plans. From an operating standpoint, Jones wants to free Borders buyers to "focus on books" rather than worrying about placing orders. In the field, Jones wants managers "to act more like merchants than operators."

Jones did not offer many details on how he will expand the company's proprietary publishing program, which will continue to be directed by Bill Nasshan. Borders announced plans to publish three titles, including a novel, beginning this summer. Jones said the proprietary program's goal is to create "distinctive products that will be available exclusively through Borders."

Both Jones and Wilhelm said they expect 2007 to be a "transformative year" for Borders and declined to provide a financial forecast. Jones did say that he expects 2007 to stabilize the retailer's financial performance and position it for growth in 2008 and beyond. One part of improving the bottom line will be, which Wilhelm expects to at least break even in 2008 and to be profitable in 2009. The company's long-term financial objectives are to achieve EBIT margins of 5%—6% by 2009, compared to a 1.8% margin in the last fiscal year, driven primarily by same-store sales growth in the low- to mid-single digits in its U.S. superstores.

The chain's need for new initiatives was emphasized in its results for the fiscal year ended Feb. 3, 2007. Total revenue rose by less than 1% for the year, to $4.11 billion. Writedowns of $186 million resulted in a net loss for the year of $151.3 million, compared to earnings of $112 million in 2005. Superstore sales were up only 1.5%, to $2.75 billion, with comp-store sales off 2.2% for the year. Walden sales were off 10.9% in the year, to $663.9 million, with comp sales off 7.5%. International sales rose 12.8%, to $650 million, but same-store sales were down 0.4%.

The fourth quarter was particularly disappointing for Borders, with revenue in the retailer's most important period up only 3%, to $1.52 billion. Superstore sales rose 2.3%, to $960.3 million, but comp sales were down 2.8%. The company had a loss of $73.6 million in the quarter, compared to earnings of $125 million in the final period of 2005. In addition to charges associated with writing down assets, profits were hurt by discounts tied to customer redemption of Borders Rewards. Jones is very high on the loyalty program, which has 17 million members, but said changes will be made, including increasing the frequency of the redemption period; currently Borders Rewards points can be redeemed only during the holiday sales period.

Borders Group Present and Future
(in millions)

2006 2009
Source: Reed Business Information
Revenue $2.750 $3.300
EBITDA 196 297
Waldenbooks Specialty
Revenue $663 $400
EBITDA -7 12
Revenue $650 $160
EBITDA 21 13
Revenue $4.063 $3.860
EBITDA 200 305

Borders Spending Plans
2006—2007 (in millions)

2006 2007
Source: Reed Business Information
Total $204 $170
New stores/relocations $86 $68—$71
Will open 25 domestic superstores and relocate or close up to 10. Will open 5-7 international stores.
Remodels $41 $27—$30
Will minimize remodeling investments as it works to develop new concept store prototype.
Systems Infrastructure/e-commerce $24 $34—$37
Will take over operation of its online retailing business from Amazon at the beginning of 2008. Will upgrade the operating systems for both Walden and the superstores. New CIO expected to be named shortly.
Maintenance/Other $53 $34—-$41

Borders Group Results
2005—2006 (in millions)

2005 2006 % chg.
Source: Reed Business Information
Superstores $2.709 $2.750 1.5%
Walden Specialty 745 664 -10.9
International 576 650 12.8
Other 48 50 4.2
Total 4.079 4.113 0.8
Net income 112 (151) NM
Margin 2.7 NM