Conference Call, 11/17/97 -- Borders Group Inc.

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. (Nov. 17, 1997) /FOOLWIRE/ -- Borders Group today reported net income of $0.4 million or $0.00 per share for its third quarter of fiscal 1997 as compared to a loss of $2.7 million or $0.03 per share for the same period a year ago. Consolidated sales for the quarter were $477.3 million, a 15.4% increase over the prior year's $413.5 million. Sales for Borders superstores increased 31.4% to $283.2 million vs. $215.6 million for the year-ago period. Sales for Waldenbooks declined 1.9% to $194.1 million vs. $197.9 million during third quarter 1996.

COMPARABLE STORE SALES. Comparable store sales grew 7.3% at Borders. Sales results at Waldenbooks reflect a comparable store sales decrease of 0.1%. Both rates were ahead of the business plan.

INCOME STATEMENT DETAILS. Consolidated gross margin grew to 25.6% of sales vs. 24.0% for the third quarter of 1996. Management attributed the improvement to continued improvements in buying, distribution, and inventory shrinkage. Selling, general and administrative expenses as a percentage of sales increased from 24.2% to 24.7%, primarily due to investments in the Internet initiative and other strategic initiatives.

BALANCE SHEET. Inventories grew from $869.8 million at Oct. 27, 1996 to $987.8 million as of Oct. 26, 1997, an increase of 13.6% and basically in line with sales growth. Borrowings under the company's line of credit were $260.2 million at quarter-end, or 38.5% usage under the line vs. last year's total of $180.0 million. The increase in borrowings reflects debt related to the acquisition of Books etc. in the U.K. and share repurchase activity, partially offset by positive cash flow from the core businesses. In the absence of the acquisition and the share repurchase activity, neither of which is anticipated to be dilutive in 1998, borrowings under the line would have decreased.

SHARE REPURCHASE. During the quarter, the company repurchased approximately $55.9 million in common stock. As a result of the repurchases, offset somewhat by the impact of option grants and the impact of a higher share price during the quarter, weighted average shares outstanding declined to 82.4 million from 82.7 million at the end of the second quarter. The share count for Q4 will be approximately 1 million less than it was for Q3, depending upon the share price.

INTERNATIONAL EXPANSION. The Company recently initiated its international expansion plans by completing the acquisition of Books etc. and opening its first Pacific Rim superstore, in Singapore, on Nov. 1. The international initiatives are expected to be nondilutive this year and next year. Management is encouraged by initial results in Singapore, and the company is learning a great deal from the opening and early results from this test store in the international market.

INTERNET INITIATIVE. As announced earlier, the Internet commerce site, Borders.com, is scheduled for launch in early January, 1998. The launch will be aided through strategic relationships and agreements with CNET, Infoseek, Salon (the Web's leading on-line literary magazine), and Harvest, the world's leading out-of-print booksearch company. Management does not expect the Internet initiative to be significantly dilutive to earnings in the coming year. The company expects to be able to leverage its existing buying and order fulfillment capabilities in servicing Internet-based sales. Also, Borders expects that marketing expenses associated with the superstores can be leveraged to serve Borders.com. Another advantage is its existing investment in inventory, which can serve both the bricks-and-mortar stores and Internet sales.

CANNIBALIZATION. Management expects that although there may well be some cannibalization of store sales by the Internet site, that may not be nearly as large as some may expect. Based on the experiences of other Web-based booksellers, Borders expects a substantial fraction of its Internet sales will come from international customers. Another large proportion of sales will come from domestic markets in which Borders does not currently have a store. Also, Internet book sales have thus far tended to be skewed towards technical and computer-oriented titles, many of which may not typically be carried in a Borders or Waldenbooks. In general, customers spend an average of 45 minutes in a Borders store, and they spend that time not because they have to but because they prefer to. So the Internet customer is probably different from the store customer in some respects. The stores also sell periodicals, bargain and clearance titles, coffee and snacks, and other impulse items.

COMMENTS ON CURRENT TRENDS. Pricing has been somewhat less aggressive as compared with past years, as Borders's closest competitor [Barnes & Noble] has reduced its discounts on hardcover books to be in line with those of Borders. Music pricing is also less difficult than it was in recent years. In general, current sales trends in the current quarter are "okay" -- driven partly by the weather. The front list of titles is relatively strong.

STORE COUNT. At quarter's end, the superstore count stood at 189, representing an increase of 18 units during the quarter. The year-ago count was 142. Waldenbooks units declined by 2 during the quarter, to 927. That compares with 966 a year ago. Management anticipates the opening of 14 superstores in the current (fourth) quarter, including the Singapore store and the acquisition of a formerly independent bookstore. For Waldenbooks, the expectation is 40-50 closings in fiscal 1997. This is below the earlier guidance, as the planned closings of approximately 20 stores will be shifted into Q1 of fiscal 1998.

GUIDANCE. Management continues to be comfortable with EPS estimates of $0.97 for 1997, and also endorses growth in EPS of 25% annually thereafter. This takes into account projected spending related to the Borders.com Web site and other initiatives. The rate of new store openings in 1998 will probably not differ significantly from 1997's rate. After Q1 of 1998, the rate of Waldenbooks closings will slow considerably as the company approaches the long-run target of approximately 800-850 Waldenbooks stores. The long-run target for Borders superstores is around 450 in the U.S.

* 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.