According to Borders (BGP), the second-largest book retailer in the country, customers visit its stores "to escape the pressures of everyday life." But the company itself can't avoid both quotidian and extraordinary pressures, as its second quarter earnings indicate with even more resolute grimness than previously understood.
For the quarter ending July 31, overall sales dropped 11.5% from a year ago to $526 million, continuing a downward spiral that's seen revenues over this time decline year-on-year from $945 million in 2007 to $749 million in 2008 to $617 million in 2009. And once again, Borders reported a net loss from continuing operations of $51.6 million (or $0.74 per share) compared to a loss of $45.1 million (or $0.75 per share) for the same period a year ago. These losses were due in large part to the sale of its stationary arm, Paperchase, to a United Kingdom-based private equity firm earlier this year and "increased promotional discounts," which were supposed to bring in more customers and counter declining sales in brick-and-mortar stores.
Speaking of which, same-store sales fell 6.8% for the quarter, which, as Publishers Lunch notes, is actually better news than in previous quarters. Borders can also take heart in the performance of its online division, which reported a 56% jump in sales to $15.5 million, though the significant increase in capital expenditures to $7.7 million (compared to $1.2 million a year ago) had a great deal to do with ramping up their e-bookstore and efforts to sell e-readers within physical stores.
Company is Focused on Digital Future -- and Beyond
Not surprisingly Borders CEO Mike Edwards focused his comments in today's release on all things digital: "Recognizing that online and digital will be a significant part of our business moving forward, we are focused on increasing our share of the eBook market by growing our digital offerings to position Borders as the preferred destination for digital reading."
Clearly Borders has to do something -- anything! -- to stem the unrelenting tide of bad news that has swamped the company all year. Five rounds of layoffs, hitching its post to new chairman Bennett LeBow and his checkered investment past, CFO Mark Bierley jumping ship, and selling off its most profitable arm to pay down considerable debt are not things that generally inspire investors (indeed, company stock is hovering around the $1 mark all day.) Its marquee e-readers are the $129 Kobo and the $99 Aluratek, but even fresh price drops can't help their lack of 3G access and also-ran status compared to the Kindle (AMZN) or the Nook (BKS).
Non-Book-Selling Strategy Flawed
Now it seems that the strategy Borders is laying out to keep itself afloat through 2011 and beyond is littered with logic holes. Specifically, they seem intent on expanding the non-book-selling efforts. But why would someone looking for a Build-A-Bear kit choose Borders, its newest strategic partner, when they could just as easily find the same kit at a Michael's, or online? Why would a $20-per-year loyalty program with deeper discounts boost company revenue when Borders keeps bleeding money with losses five out of the last six quarters? And why would any of these new initiatives inspire customers or investors when Borders turns around and trumpets how much money they save from closing "Project Phoenix" stores like the 23,000-square-foot flagship store in San Francisco, one of many that could never turn a profit because the rents were simply too high?
All reasonable questions, but let's not stick a fork in Borders quite yet; there is always the possibility that "Area E" could be a great success and customers will amazingly flock to stores for teddy bear kits and a growing number of non-book items. But by moving away from the core business of selling books, Borders may find themselves unable to do what they once did best (and occasionally still do well): turn a book into a bestseller by sheer force of will. For now, that's something Amazon and other e-tailers simply cannot do -- it's one of the few ways in which superstores have the advantage. But at the rate they are going, the "relaxed and hassle-free shopping experience" Borders hopes (or begs?) customers to have is shaping up to be a bitter reminder of the ongoing struggles faced by the retailer.
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