Investing to Wealth

Borders Group Inc. (NYSE: BGP)

Borders Group Inc. (BGP), through its subsidiaries, operates book, music and movie superstores, and mall-based bookstores. The Company’s operating subsidiaries include Borders Inc., Walden Book Company Inc. and Borders Australia Pty Ltd. The Company operates in three segments: Borders Superstores, Waldenbooks Specialty Retail stores and International stores. At January 31, 2009, it operated 518 superstores under the Borders name, including 515 in the United States and three in Puerto Rico. The Company also operated 386 mall-based and other small format bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. On June 10, 2008, the Company sold all of the outstanding shares of Borders Australia Pty Ltd., Borders New Zealand Ltd. and Borders Pte. Ltd. to companies affiliated with A&R Whitcoulls Group Holdings Pty Ltd.

The Company was founded in 1971 and is headquartered in Ann Arbor, Michigan.

Source: Reuters.com, SEC Filings.

Financial Summary

On an operating basis, the Company generated a loss from continuing operations of $39.0 million or $0.65 per share compared to a loss of $39.0 million or $0.64 per share a year ago. On a GAAP basis, the loss from continuing operations was $38.5 million or $0.64 per share compared to a loss of $172.2 million or $2.85 per share a year ago. The $0.64 per share loss includes income of $0.01 per share of non-operating adjustments that were primarily non-cash. Year-to-date, on an operating basis, the Company generated a loss from continuing operations of $67.6 million or $1.12 per share compared to a loss of $80.0 million or $1.33 per share a year ago. On a GAAP basis, the year-to-date loss from continuing operations was $170.1 million or $2.83 per share compared to a loss of $213.6 million or $3.55 per share a year ago. The $2.83 per share loss includes $1.71 per share of non-operating charges that were primarily non-cash.

Adjusted EBITDA was a loss of $34.2 million compared to a loss of $25.5 million in the prior year quarter. On a year-to-date basis, the adjusted EBITDA loss was $24.3 million compared to a loss of $24.9 million in 2008.

Total consolidated sales were $595.5 million, down $86.6 million, or 12.7%.

Inventory was reduced by $99.1 million, led by the reduction in multimedia inventory of $70.4 million.

Comparable store sales declined by 12.1% and 7.2% at BoPG superstores and Waldenbooks Specialty Retail stores, respectively. Excluding multimedia, comparable store sales at BPG declined by 8.5%.

SG&A expenses, on an operating basis, were reduced by $27.1 million.

Debt, net of cash, at the end of the third quarter was $375.0 million, a reduction from the prior year of $112.0 million, or 23.0%. Debt, net of cash, compared to year-end levels increased by $92.4 million, or 32.7% as inventory was added to core book categories throughout the third quarter.

Third-quarter consolidated sales were $595.5 million, a 12.7% decrease from the same period a year ago. On an operating basis, the Company generated a third-quarter loss from continuing operations of $39.0 million or $0.65 per share compared to a loss of $39.0 million or $0.64 per share a year ago. On a GAAP basis, the loss from continuing operations was $38.5 million or $0.64 per share compared to a loss of $172.2 million or $2.85 per share a year ago. The $0.64 per share loss includes income of $0.01 per share of non-operating adjustments that were primarily non-cash.

Excluding non-operating charges, SG&A as a percent of sales improved over third quarter last year by 0.4% from 28.7% to 28.3% due to the Company’s aggressive expense reduction initiatives, which were partially offset by de-leveraging due to negative sales trends. Expense reduction initiatives helped reduce SG&A dollar expenses in the third quarter by $27.1 million compared to the prior year. On a GAAP basis, SG&A as a percent of sales was down compared to last year by 1.0% from 30.1% to 29.1%.

The Company made an additional investment of $16.8 million in inventory within its core book category compared to the same period last year. At the same time, Borders Group reduced third-quarter inventory in the multimedia category by $70.4 million and by $45.5 million within its Waldenbooks Specialty Retail segment due to store closures over the past 12 months. In total, inventory was reduced by $99.1 million for the period.

Third-quarter capital expenditures were $6.8 million compared to $17.9 million in 2008 as the Company continued to manage capital prudently. For the full year, capital expenditures were $11.2 million compared to $72.0 million a year ago. Debt, net of cash, at the end of the third quarter was $375.0 million, a reduction from the prior year of $112.0 million, or 23.0%. Debt, net of cash, compared to year-end levels increased by $92.4 million, or 32.7%.

Source: Reuters.com, SEC Filings.

Analyst Consensus

This is the consensus forecast amongst 1 polled investment analysts. Against the Borders Group Inc (MI) company.

The one analyst offering a 12-month price target expects BGP share price to fall to 1.00 in the next year from the last price of 2.00.

Source: www.ft.com

Consensus Estimates Analysis

Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=BGP

Investment Highlights

BGP’s board of directors recently approved a new incentive plan aimed at retaining its top executives as the bookstore chain fights to regain its financial health. The program is designed to give management time to develop a business plan for the second half of 2010 with achievable EBITDA targets that the board’s compensation committee will consider in setting incentive goals for the second half of the year. As part of the plan, salaries for the five executives covered in the plan, which include interim CEO Michael Edwards, will remain at last year’s levels.

The first bonus opportunity will pay Edwards $148,092 on November 1 if he remains at Borders through September 30. He will receive the same amount April 15, 2011, if still-to-be determined financial targets are hit. Other executive who are covered in the program are CFO Mark Bierley who stands to earn $130,978 in each of the two bonus periods; general counsel Thomas Carney who could receive $75,430 in the two periods; CIO David Scott Laverty, who is eligible to receive $70,671 in both periods; and svp of human resources Shereen Solaiman who could get $65,277 in the two periods. The board’s compensation committee also passed another compensation arrangement for Bierley that will make him eligible to receive a cash payment of $150,000 if he is employed by BGP through June 1, 2011.

BGP has experienced a high share of executive turnover during its attempt to turnaround the business. In January, CEO Ron Marshall left the Company after one year in office that led to the appointment of Edwards as interim CEO. The Company has also continued to downsize its operations and earlier this month laid of an undetermined number of store employees.

Source: http://www.borders.com/online/store/BGIView_aboutus

Technical Analysis

Source: http://stockcharts.com

BGP is trading above its 50-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

BGP is trading near its upper Bollinger Band. This suggests that the stock price is high relative to its recent price action.

The MACD for BGP currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

Comparative Analysis

Source: Thomson Financial

Insider Trading Activity

Source: Yahoo Finance

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