The Motley Fool: The Boring Portfolio

ANN ARBOR, Mich. (March 9, 1998) -- The 1998 "What -- Me Worry?" market began to display a few worry lines on Monday, following Compaq's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> warning late Friday of slow sales and profits.

The Nasdaq slumped 1.62%, while the S&P 500 lost a relatively modest 0.32% -- perhaps too modest, some might say. As for the Boring Portfolio, it split the difference, falling 0.93% -- due principally to a $3 1/8 loss in shares of Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>.

On the upside, Andrew Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANDW)") else Response.Write("(Nasdaq: ANDW)") end if %> bucked the tech slump, rising $5/16, and Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> ascended $7/16.

Borders Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %> reported its fiscal fourth quarter and 1997 sales prior to the opening bell this morning. In line with the company's recent guidance, Borders made $0.96 per share in the fourth quarter, up 17% over year-ago EPS of $0.82. Consolidated fourth-quarter sales increased 18% to $859 million. The stock eased $3/8 to $34.

We'll be providing a synopsis of the follow-up conference call shortly. For now, permit me to offer a few highlights -- particularly as they pertain to the long-awaited Borders.com launch and the company's guidance for 1998.

Management expects sales to rise to $2.6 billion in 1998, an increase of approximately 16.5%. Gross margin should improve, by approximately 70 basis points for the year (0.70%). Capital expenditures are projected to increase by about $50 million to $165 million, reflecting continued spending on the Internet site and international expansion, as well as increased investments in domestic distribution and information systems.

All in all, Borders execs said that the current quarter is on plan, and they project diluted earnings of $1.21 per share.

The company expects to open 40 domestic Borders superstores and 3 international Borders during the year. On the Waldenbooks side, the projection is for net closings of approximately 38 sites, comprised of 8 openings and 46 closings; most of those closings will occur in the current quarter or late in the fourth quarter.

Management said they are pleased with the performance of the Singapore store and the Books etc. stores and plans to open three more Borders superstores outside the U.S. in the later part of 1998: two in the U.K. and one in Australia. Books etc. opened one store during the fourth quarter. Management anticipates opening four new Books etc. stores in the U.K. during the year.

Management also said they are "very hopeful" of launching Borders.com in the current quarter. Having said that, they reiterated that they want to make sure that when they do launch the site, everything is as it should be. Internet sales are projected to be approximately $25 million for the year.

The Internet is going to be a great business for Borders, said the company execs, but it is not as efficient a business operation as some would believe. They said that the "single-pick" fulfillment operation is significantly more expensive than the traditional model. Also, "cyber-rent" can be higher than physical rent, when you have to pay to partner in order to attract customers to your site.

These costs will decline over time as they do in every business model, and Borders will participate in that change. But to represent Internet sales as the cheapest, fastest, most efficient is probably the wrong way to think about it. The Borders.com site provides an alternative shopping means for some customers; it's a convenient way to buy the company's products, especially if Borders can provide them on an affordable basis.

Borders has a large distribution facility in Nashville that is oriented around small-order fulfillment, currently for customer special orders and some Internet-based sales. Borders' California distribution facility is being automated along the lines of the Nashville facility to support similar fulfillment. These fulfillment facilities will support sales through the Borders.com Internet site, with the Nashville facility capable of carrying as many as 750,000 titles.

TODAY'S NUMBERS

Stock  Change    Bid 
 ANDW  +  5/16  28.06 
 CGO   +  7/16  30.44 
 BGP   -  3/8   34.00 
 CSL   -  1/2   46.75 
 CSCO  -3 1/8   61.19 
 FCH     ---    34.94

                   Day   Month    Year  History 
         BORING   -0.93%  -0.51%   0.01%  25.84% 
         S&P:     -0.32%   0.28%   8.44%  69.28% 
         NASDAQ:  -1.62%  -2.56%   9.86%  65.73% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     34.00   202.06% 
   8/13/96  200 Carlisle C    26.32     46.75    77.59% 
   6/26/96  150 Cisco Syst    35.93     61.19    70.28% 
    3/5/97  150 Atlas Air     23.06     30.44    32.00% 
   1/21/98  200 Andrew Cor    26.09     28.06     7.56% 
   11/6/97  200 FelCor Sui    37.59     34.94    -7.06% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13600.00  $9097.51 
   8/13/96  200 Carlisle C  5264.99   9350.00  $4085.01 
   6/26/96  150 Cisco Syst  5389.99   9178.13  $3788.14 
    3/5/97  150 Atlas Air   3458.74   4565.63  $1106.89 
   1/21/98  200 Andrew Cor  5218.00   5612.50   $394.50 
   11/6/97  200 FelCor Sui  7518.00   6987.50  -$530.50 
  
                              CASH  $13625.51 
                             TOTAL  $62919.26