FOOL CONFERENCE CALL SYNOPSIS*
By Gregory 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. (Aug. 14, 1997) /FOOLWIRE/ -- Borders Group today reported net income of $0.5 million or $0.01 per share for its 1997 second quarter ended July 27, 1997. That compares to a loss of $2.2 million or $0.03 per share for the second quarter of 1996. Consolidated sales for the quarter were $466.3 million, a 12.6% increase over the prior year's $414.3 million. The results reflect a 28.2% increase in sales for the Borders superstores to $272.4 million vs. $212.5 million for the year-ago period and a 3.9% decline in Waldenbooks sales to $193.9 million vs. $201.8 million during the second quarter of 1996. Management attributed the improvement over last year's performance to a combination of strong sales performance at both Borders and Waldenbooks, as well as favorable gross margins and expense control -- offset in part by strategic spending on new business initiatives.

YEAR TO DATE. For the year to date, net income was $0.9 million or $0.01 per share versus a net loss of $5.7 million or a $0.07 per share loss for the first two quarters of 1996.

COMPARABLE STORE SALES. The sales increase at Borders reflects a comparable store sales increase of 7.5% for the quarter, which was ahead of the company's business plan. Excluding Borders expansions and relocations, comparable sales gains were also 7.5%, reflecting the declining number of expansions and relocations. Waldenbooks showed a comparable store sales decline of 1.8% for the quarter, largely attributable to the impact of a popular book by John Grisham on last year's sales.

CHANGES IN NUMBER OF STORES. Borders stores increased during the preceding 12 months from 127 to 171, including the opening of 8 units during the quarter. Waldenbooks closed 5 units and opened 4 during the quarter, resulting in 929 units versus 966 a year ago. At the end of the quarter, Borders total square footage was 4.71 million sq.-ft., and Waldenbooks was 3.51 million sq.-ft.

INCOME STATEMENT DETAILS. Consolidated gross margins grew from 23.6% of sales for the second quarter of fiscal 1996 to 24.7% for the second quarter of fiscal 1997. Management attributed the 110 basis point increase in gross margins to a number of factors, including continued improvements in distribution, shrink, and purchasing as well as a decline in occupancy expense as a percentage of sales due to continued maturation of the Borders business. Selling, general, and administrative expenses were 23.8% of sales for the quarter as compared to 23.7% in 1996 as the company continued to invest in new business initiatives, including but not limited to its planned Internet sales and service Web site.

BALANCE SHEET DETAILS. Inventories grew from $628.4 million at July 28, 1996 to $719.4 million as of July 27, 1997, an increase of 14.5%. Inventories net of accounts payable grew from $345.7 million to $392.7 million over the same period, an increase of 13.6%. The increase in net inventories is in line with the overall sales increase and the change in the number of Borders and Waldenbooks units during that period. Borrowings under the Company's line of credit were $105.0 million at quarter-end, or 35.0% usage under the line, which represents a reduction of $20.0 million or 16.0% vs. the balance at the end of the second quarter last year.

GUIDANCE. The company still expects to open a total slightly more than 40 superstores in the fiscal year [ending January] and expects to close 50 to 75 Waldenbooks in the year. Nearly all of the openings will occur before the holiday shopping season, and the majority of Waldenbooks closings will occur in January. Business plans are for comparable store sales of approximately +6% for Borders and -3% for Waldenbooks in the third quarter, leading to a net loss of approximately $0.03, in line with consensus estimates. In light of the favorable results for the second quarter, the company is comfortable with increasing EPS estimates for the full year to $0.94 from $0.92 -- which would be a greater than 30% increase over 1996 in earnings per share. Store openings are progressing smoothly, both in terms of meeting scheduled dates and achieving initial sales expectations.

SHARE REPURCHASE. The company has authorization to repurchase up to $50 million in stock and has repurchased $6 million in stock this year to date.

INTERNET SITE. The Borders Internet set will be launched in the second half of this year. The company has made a significant investment and will continue to do so to tap the opportunities that management sees in Internet sales and service to customers. Management declines to comment further in light of competitive considerations. However, unlike some competitors, Borders does not expect its Internet business to incur multi-million dollar losses for years. Instead, the new initiative is expected to begin making a positive contribution after approximately one year to 18 months.

COMMENTS ON THE BOOK INDUSTRY. There has been a good deal of media attention devoted to problems in the book publishing industry recently. What has happened is that sales of "blockbuster" books is often not meeting publishers expectations, leading to above-average returns of unsold books to publishers even though Borders and other booksellers are selling lots of books. To some extent, this is due to the broader array of choices available to book purchasers, partly as a result of the expansion of the superstore format. The situation is perhaps analogous to what happened when cable television expanded and ratings for shows on the three major networks declined, even though total viewership increased. Some publishers are advancing very large sums to authors -- sometimes for somewhat questionable concepts -- and then are required to make large initial print runs in hopes of recovering the up-front costs. Sometimes those expectations are unrealistic. Publishers that forego that route are doing well, and the publishing industry as a whole is coming to recognize that changes in certain inefficient business practices are in order.

BORDERS RETURNS. Even though bookstores can return unsold goods to publishers for a full refund, the stores must pay the costs of handling and freight. It is therefore in Borders's interest to keep returns to a minimum, and its return rate is below the industry average.

UPS STRIKE. The UPS strike is having no material impact on Borders. The company handles virtually all of its distribution through its own network of contracted carriers, and it uses an alternative to UPS for its own corporate deliveries.

* 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.