Conference Call, 05/14/97 Borders Group, Inc. (NYSE: BGP) Q1

FOOL CONFERENCE CALL SYNOPSIS*
By Greg Markus (TMF Boring)

Borders Group, Inc.
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500 E. Washington St.,
Ann Arbor, MI 48104
313-913-1100
http://www.borders.com

ANN ARBOR, Mich., (May 14, 1997) /FOOLWIRE/ -- Borders Group, Inc. today announced operating results for the first quarter of fiscal 1997 ended April 27, 1997.

INCOME. Net income of $0.4 million (less than one cent per share) compared to a loss of $3.4 million or $0.04 per share for the first quarter of fiscal 1996. This beat analysts' estimates of a loss of two to three cents per share.

SALES. Consolidated sales for the quarter were $463.6 million, a 15% increase over the prior year's $404.0 million. The results reflect a 31% increase in sales for the Borders superstores to $266.3 million vs. $203.8 million for the year-ago period and a 1.4% decline in Waldenbooks sales to $197.3 million vs. $200.2 million during the first quarter of 1996. The sales increase at Borders reflects a comparable store sales increase of 9.5% and an increase in stores during the preceding 12 months to 163 from 124. The sales decline at Waldenbooks reflects a comparable store sales increase of 1.1% offset by a decrease in the number of stores to 930 from 976 over the prior 12 months.

MARGIN. Consolidated gross margin grew from 23.1% of sales for the first quarter of fiscal 1996 to 24.3% for the first quarter of fiscal 1997. Management attributed the gain to continued improvements in distribution and inventory shrinkage [i.e., shop-lifting], improved merchandise mix management, and a decline in occupancy expense as a percentage of sales due to both the continued maturation of the Borders stores and the continued shift in sales base from mall stores to superstores. Generally favorable weather also probably contributed to the strong performance; to that extent, it is hard to know how much of this quarter's results will be replicable in future quarters. That said, the company is "very bullish" about profit margins going forward.

EXPENSES. Selling, general, and administrative expenses as a percentage of sales were unchanged at 23.8% due to ongoing leveraging of corporate overhead over a larger sales base, offset by increased spending on strategic initiatives expected to provide future benefits, including development of Borders' capacity to support product sales via the Internet..

INVENTORIES. Inventories grew from $651.2 million at April 28, 1996 to $750.6 million as of April 27, 1997, an increase of 15.3%. Inventories net of payables grew from $348.2 million to $399.6 million over the same period, an increase of 14.8%. The increase in net inventories is in line with the overall sales increase and the increase in the number of Borders units during that period.

STORE COUNT. Borders' store count represents an increase of 6 units during the quarter, bringing the total to 163. Waldenbooks' units declined by a net total of 31 during the quarter, reflecting 32 closings and one opening. The plan is to add a total of 40 new Borders stores during 1997 (including the 6 opened in Q1), and to close 50 to 75 Waldenbooks. The long-term target is to level off Waldenbooks at 800 to 850 stores, as compared with the current 930.

INTERNET SELLING. Borders' management believes that some of the hype about selling books over the Internet is overdone; even the more aggressive projections of $500 million in Internet sales by the year 2000 would constitute only 2% of total book sales. Nevertheless, management definitely sees a place for Internet commerce in the company's business plan. The Web is particularly handy for customers who don't live or work near a Border superstore, they say. On the other hand, customers have to wait to get their books when they order remotely, and the apparent price discount is substantially offset by shipping and handling fees. Also, the "shopping experience" at a bricks-and-mortar Borders can be "not unenjoyable." Borders Website will emphasize selection and service, just as their stores do now. Management does not to expect any appreciable contribution to revenues from Web sales before 1999.

STORE PRODUCTIVITY. The productivity of newly opened stores continues to improve relative to that of stores when they opened last year or the year before. The reduced costs of the "wall-less" store design permit the company to open new stores with a lower initial sales per square foot figure. As the stores mature, sales per square foot increases and then stabilizes.

GUIDANCE. Previous guidance was for earnings of $0.90 per share this year. In light of the Q1 results, the company is comfortable with a revised estimate of $0.92. Last year, the sales mix was approximately 50% from the superstores and 50% from the mall-based Waldenbooks. This year, it will be closer to 57%/ 43%, in favor of the superstores. The current business plan calls for those two business lines to provide continued sales growth to support annual EPS gains of at least 25% through 1999. After that, new business lines -- which would include Internet commerce and, possibly, expansion internationally -- will offset any maturation of the core business lines so as to help Borders Group maintain at least a 25% rate of earnings growth well into the next decade.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.