Borders and other sellers are breaking bonds with Amazon and forming their own online sites. It will be developing a consolidated Borders.com e-commerce Web site, ending its 6-year-old partnership with Amazon.com, and plans to publish exclusive books by celebrities, first-time authors and others under the Borders name.

Booksellers due for a rewrite

Published: Friday, March 23, 2007
By Anne D'Innocenzio
The Associated Press

NEW YORK -- A sluggish book market and intense competition from rivals like Amazon.com and Costco are forcing the nation's top two book sellers -- Barnes & Noble Inc. and Borders Group Inc. -- to rewrite the rules on the book business. Their challenges were revealed as both merchants reported disappointing fourth-quarter results on Thursday.

Borders, which reported a loss in the quarter, announced a dramatic shakeup of its business -- it plans to cut the number of its Waldenbooks stores in half, to about 300 by the end of next year, and is considering the possible sale of most of its international businesses. The Ann Arbor-based company said it aims to focus more of its efforts on its domestic Borders superstore business and better tailor those stores to local markets.

It will be developing a consolidated Borders.com e-commerce Web site, ending its 6-year-old partnership with Amazon.com, and plans to publish exclusive books by celebrities, first-time authors and others under the Borders name.

"We need to reinvent our business to exploit the rapid changes taking place in how consumers access information and entertainment," Borders Group Chief Executive George Jones said in a statement.

Borders is working on a new concept store prototype that will be refined this year and is expected to be unveiled in early 2008.

Barnes & Noble, which eked out a small profit increase in the fourth quarter, has focused on further sweetening deals to its best customers. It already operates an e-commerce site and has developed a publishing business through its acquisition of Sterling Publishing.

In a conference call with investors Thursday, Barnes & Noble's CEO Steve Riggio emphasized that it needed to offer customers better deals -- even if it hurts profits in the short term -- saying that industry growth is slower than in the past and competition is fiercer.

"We're just trying to increase what we have by making it easier for people to shop both online and in the stores. And you know, giving them a better deal," he said.

Competition from discounters like Wal-Mart Stores Inc., which can afford to slash prices on books, has squeezed profits at Barnes & Noble and Borders, which have responded with their own discounts.

There have been rumors about private equity buyouts of the nation's top booksellers. A report from Goldman Sachs analyst Matthew Fassler issued Wednesday revealed that it would make sense for Barnes & Noble, the larger operator, to buy Borders, though it would face "significant regulatory hurdles."

Barnes & Noble executives declined to comment during the conference call on the issue. Anne Roman, a spokesman at Borders, also declined to comment.

Barnes & Noble reported a fourth-quarter profit of nearly $127 million, or $1.84 per share, versus a profit of $123 million, or $1.76 per share, in the year-ago period. It also forecast a loss in the first quarter.

Sales reached $1.88 billion, up from $1.75 billion in the year-ago period.

Analysts surveyed by Thomson Financial expected fourth-earnings per share to be $1.88 and revenues to be $1.87 billion.

On March 5, Barnes & Noble warned that profits for the current year would be below analysts expectations, attributing its muted outlook in part to the company's move to reward its best customers by cutting prices. And while J.K. Rowling's "Harry Potter & the Deathly Hallows," which will go on sale July 21, will produce a large sales spike in the second quarter, it will be sold at a deep discount, a move that will reduce profit margins.

Borders reported a fourth-quarter loss of $73.6 million, or $1.25 per basic share, for the three months ended Feb. 3 compared with a profit of $119.1 million, or $1.78 per diluted share, in the previous year.

Borders uses basic per share results when it records a loss and diluted per share results when it sees a profit.

The quarter's results included $2.86 per share in charges related to goodwill, store closure costs and accelerated depreciation costs related to store remodeling.

Excluding the charges, earnings totaled $1.61 per share versus $1.87 per share a year ago.

Analysts polled by Thomson Financial were looking for a profit of $1.63 per share.

Revenue edged up to $1.52 billion from $1.48 billion a year ago. Consensus estimates put sales at $1.48 billion.

Borders plans to launch its new Borders.com site early next year and be independently profitable in 2009.

Barnes & Noble's shares slipped $1.10, or 2.82 percent, to close at $37.90 on the New York Stock Exchange. Borders' shares dropped 73 cents, or 3.41 percent, to $20.70 per share.