Unable to Compete, Borders May Sell Chain

By David Runk
Associated Press
Friday, March 21, 2008

Borders said yesterday that it may put itself up for sale, and rival Barnes & Noble said its fourth-quarter profit dropped 9 percent as the industry struggles with intense competition from discounters.

Shares in Borders tumbled as the nation's second-largest bookseller said that it was considering options, including the sale of the company or certain divisions, and that it had lined up $42.5 million in financing to help keep it running through the year.

Despite its earnings slide, Barnes & Noble boosted its dividends and surprised Wall Street with predictions of a profitable first quarter. Analysts said Barnes & Noble, the nation's largest bookseller, would be the most likely suitor for Borders.

Both big bookstore chains have deepened discounts for their members, as shoppers are even more focused on low prices for discretionary items as they pay higher prices for gas and food.

Analyst Michael Norris at the market research firm Simba Information said customers are increasingly turning to wholesale clubs and other discounters like Target and Wal-Mart for books and other merchandise.

"This is going to be a really tough year" for booksellers, Norris said.

Borders is a year into a restructuring that includes revamping its U.S. superstores as part of an effort to lure more shoppers. But the evaporating credit market led to the financing announced yesterday from hedge fund Pershing Square Capital Management, its largest shareholder.

"In the economic environment, we believe we're on the right track and our plan is the right one to get us there," chief executive George Jones told analysts. "Now we have the flexibility necessary to get us where we need to be." Without the funding, he said, "liquidity issues" may have been only months away.

Borders suspended its quarterly dividend, which it will instead put into operations, and says its plans for earnings per share growth may take longer than expected.

"Borders, which has finally found a CEO that can improve the merchandising, is finding that its poor cash flow and balance sheet is forcing it to make some very unattractive decisions," Credit Suisse analyst Gary Balter wrote to investors. The loan from Pershing Square, he noted, comes at a high 12.5 percent interest rate.

Barnes & Noble told analysts that it had not been approached by Borders but would take a "good look" at the company if it were.

In fourth-quarter results that were delayed for one day, Borders reported profit of $64.7 million, compared with a loss of $73.6 million in the comparable period a year earlier. Revenue fell 2 percent, to $1.35 billion, for the quarter ended Feb. 2. For the year, Borders' loss widened to $157.4 million from $151.3 million the previous year. Revenue grew 2.6 percent, to $3.82 billion.

Barnes & Noble said it had a profit of $115.0 million in the fourth quarter, down from $126.7 million. Revenue fell 1.7 percent, to $1.85 billion. For the full year, profit shrunk 9.8 percent, to $135.8 million, and revenue fell 2.8 percent, to $5.41 billion.

Borders shares lost 28.6 percent, to close at $5.07, while shares of Barnes & Noble gained 8.1 percent, to $30.27.

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