Friday, March 21, 2008


report overnight from Publishers Lunch

Borders In Financial Distress: Will Sell Parts or EverythingFacing a liquidity crisis--unable to borrow in today's nervous and restricted credit markets, with a plunging stock that valued the entire company at about $400 million yesterday (and far less in today's markets)

--Borders has gone to the loan shark and is considering a "wide range of alternatives including the sale of the company and/or certain divisions." They have enlisted JPMorgan and Merrill Lynch to assist in exploring strategic alternatives and sale possibilities, which may or may not include the sale and/or certain divisions. In their own conference call with investors this morning, Barnes & Noble management said, "We haven't been approached by Borders investment bankers, and if we are, we'll certainly take a good look at the company and put it under review."Borders suspended its quarterly dividend and will borrow $42.5 million from Pershing Square, its largest shareholder (which has lost a fortune on the declining stock). The price will be steep: Pershing Square gets a 12.5 percent interest rate on the 10-month loan. They also get almost 15 million stock warrants that can be exercised at $7 a share, slightly lower than yesterday's closing price, which would more than double their stake in the company, adding another 20 percent.
And Borders can require Pershing to buy the Australia and New Zealand stores (already up for sale) as well as stores in Singapore and the Paperchase stationary chain, all for $125 million--considered well below the value of the operations.That part of the deal sets a floor price for those assets to help drive higher bids and gives the company a scenario to help save the US bookstores. CEO George Jones says in their statement, "We believe that consummation of the transactions under the commitment will make us fully funded for 2008, where absent these measures, liquidity issues may otherwise have arisen in the next few months." Of course if they had not backed off the deal to sell the Australia and New Zealand stores they would have gotten the cash they needed with the measures announced today. Jones also said that "this will be a challenging year for retailers due to continued uncertainty in the economic environment," and that "the current credit environment has made many of these alternatives prohibitively expensive or entirely unavailable."

Operationally the company is performing better than today's financial news might indicate. Fourth quarter sales rose 2.8% to $1.3 billion, and same-store superstore sales were up 2.1 percent, the third consecutive quarter of same-store sales gains. Books sales rose 3.2% on a same-store basis but music fell 14.2%. Cafe and gifts and stationery were up 13.3% and 10%, respectively.
Net income was $64.7 million compared to a net loss of $73.6 million in the previous year's fourth quarter, while operating income was $84.7 million compared to $87.7 million for the previous fourth quarter. Full year sales rose 4.2% to $3.8 billion while the net loss was $157.4 million compared to a net loss of $151.3 million for the previous year. For the year, same-store sales were up 1.5%.

Jones said that the company was on track to reach its 2009 financial targets, but said "we will be slowed in our progress and expect that we'll reach them later than originally anticipated. Still, we believe that our strategic plan remains the right path toward achieving these goals. The problem is they lack the cash to fund Jones' ideas, like their concept stores, and their new web site. Now the rush to reduce inventory and increase face out makes even more sense, as the company uses returns to publishers to help their operating liquidity while potentially increasing sales.Release


B&N Announces Fourth Quarter Results, Increased
While Borders is suspending its dividend, Barnes & Noble announced an increase in their quarterly cash dividend from $0.15 to $0.25 per share, commencing with the dividend to be paid in June 2008. In addition, Barnes & Noble's fourth quarter statement confirms previously reported preliminary results and adds a guidance note for 2008 in advance of its first quarter earnings report on May 22.
B&N expects first quarter comparable bookstore sales to be slightly negative, and as previously announced, full-year comparable store sales are expected to be slightly positive. Barnes & Noble's first quarter earnings are expected to range from $0.05 to $0.10 per share, and full-year earnings are still expect to be approximately flat with 2007 on an operating basis.

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