Borders Group Reports Second Quarter 2010 Results

Borders Group Reports Second Quarter 2010 Results

Conference call today, Sept. 1, at 10 a.m. Eastern

ANN ARBOR, Mich. Sept. 1 /PRNewswire-FirstCall/ -- Borders Group, Inc. (NYSE:BGP) today reported results for its second quarter ended July 31, 2010. Highlights include:

-- Second quarter sales were $526.1 million, down 11.5% from the same
period a year ago, with comparable store sales declining by 6.8%.
Borders.com sales increased 56.2% over the prior year, to $15.5
million.
-- The company generated a loss from continuing operations in the second
quarter 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.
-- Debt net of cash decreased compared to the first quarter by 13.7%, or
$41.5 million. It increased by 2.7% compared to the second quarter of
last year, to $262.1 million.

"While we continue to succeed in strengthening our financial structure, we are highly focused on driving profitable sales and increasing market share," said Mike Edwards, CEO of Borders. "Based on extensive consumer research, we are doing a number of things to excite our customers going into the critical holiday shopping season, including launching our new Borders Rewards program, which includes the new paid Borders Rewards Plus. 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. Yet as we grow our online and digital business, we cannot underestimate the importance of our brick and mortar presence. This will be top of mind as we work on improving the in-store experience by shifting our product mix to include additional non-book products that are both compelling and relevant, and providing an escape for our customers though an inspirational in-store environment and consistent customer service."

Second Quarter Results

All earnings/loss figures reported throughout this news release are on a GAAP basis unless otherwise noted, and exclude the results of discontinued operations. Beginning with this news release, the company will report results as a single segment. This change is the result of the sale of the company's Paperchase subsidiary during the second quarter of 2010, which constituted the majority of the previously-reported International segment. The company classified the sale and operations of Paperchase as a discontinued operation.

Second quarter sales were $526.1 million, down 11.5% from the same period a year ago, with comparable store sales declining by 6.8%. Sales were positively impacted by Borders.com, which saw a second quarter increase of 56.2% over the prior year, to $15.5 million.

The company generated a second quarter 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, driven primarily by decreased gross margin. As a percent of sales, gross margin decreased from 23.0% to 19.3% in the second quarter, resulting from increased promotional discounts and the de-leveraging of fixed occupancy costs caused by negative comparable store sales.

SG&A expense as a percent of sales improved in the second quarter to 26.5% from 27.3%, and declined in dollars by $22.7 million. This was due to the company's continuing aggressive expense reduction and store closure efforts, which were partially offset by de-leveraging due to negative sales trends.

Second quarter capital expenditures were $7.7 million compared to $1.2 million for the same period a year ago. Spending in the second quarter of 2010 was focused on the development of the Borders eBook store, which launched during the second quarter, and spending on "Area-e" shops.

Debt net of cash at the end of the quarter totaled $262.1 million compared to $255.3 million last year, a $6.8 million or 2.7% increase. The company was able to reduce the amount outstanding under its $90.0 million term loan by $25.0 million through the sale of its Paperchase subsidiary for $31.2 million in the quarter.

Borders' Focus on the Future
Expanding Digital, Online and Social Media

The company is leveraging its strong brand recognition among book lovers -- particularly its millions of Rewards members -- to position Borders as the preferred destination for both digital content and devices. Borders' recently launched eBook store has been very well received by customers. In line with its vision to be a trusted retailer that provides customers with a variety of eReading devices at prices that fit virtually all budgets, the company is now offering six devices including the Kobo eReader, Aluratek "Libre" eBook Reader Pro, Velocity Micro Cruz(TM) Reader and Velocity Micro Cruz(TM) Tablet as well as two Sony devices. Sales of the Kobo as well as pre-orders for the Aluratek and Velocity Micro devices have exceeded expectations. The company expects to announce additional devices in the coming weeks.

The company is taking further steps to make eReading accessible for virtually everyone by lowering the price of the Kobo unit to $129.99 and the Libre Pro to $99.99, which will make it among the most aggressively priced devices in the industry. Borders will complete its digital initiative with the roll out of its Area-e digital shops, which will conclude in early October. The shops will provide an enjoyable environment where customers can experience a variety of different eReaders, guided by knowledgeable staff, who can demonstrate the devices and answer questions.

"Borders is now an industry authority on digital content and devices," said Edwards. "We offer a large assortment of eReaders at price points that fit with most budgets and we are exploring adding new devices and brands in the fourth quarter as part of our device neutral strategy. As our newly launched eBook store and mobile apps gain traction, we believe we hold a strong growth position within a digital ecosphere that is rapidly evolving and expanding."

The company is currently executing programs to increase conversion rates and drive increased traffic to Borders.com. It recently introduced its new "Borders Textbook Marketplace," which features more than 1.4 million titles and a textbook buyback option. Borders is also expanding its merchandise mix online to include high growth and higher margin product.

Understanding the importance of connecting with customers where they spend their time, the company is expanding its social media footprint. It recently introduced the "Facebook Like" feature on all title detail pages, allowing customers to share their favorite books and other products with their friends on Facebook. The company also recently revamped its Facebook page to include rich content around topics and themes important to Borders' customers. In just one week after the launch of the new page, the company grew its fan base by more than 100,000 members.

Committed to Improving the Retail Experience and Strengthening the Borders Brand

Borders' research has indicated that most customers come to Borders to escape the pressures of everyday life. To promote a relaxed and hassle-free shopping experience, the company is enhancing its stores with new signage that improves navigation and highlights value offerings. Borders is also reorganizing sections to promote discovery and enhance shopability. Recognizing that it must improve store productivity to address the top line, the company is also shifting its merchandising mix to include more non-book products that complement the Borders brand.

The Children's section represents a key growth platform. To that end, the company is taking steps to provide a retail experience that is both fun and educational for kids and their families by expanding the assortment of educational kids toys and games. In addition, the company recently launched a partnership with Build-A-Bear Workshop to include several Build-A-Bear craft kits as well as other products in the Children's area. Borders is also continuing to focus on products that increase the average ticket and provide clear margin improvements including growing its Bargain and value book category.

In addition to growing and expanding into categories that delight customers, the company is also discovering new ways to enhance guest satisfaction. Borders will soon announce a new customer service program that will complement the company's successful -- and the industry's only -- In-Stock Guarantee, which means that customers always find what they are looking for when they shop with Borders.

"We are taking steps to transform our retail model, in part through high-impact strategic partnerships, like Build-A-Bear Workshop, that enable us to offer a compelling mix of lifestyle focused products," continued Edwards. "By offering a rich and relevant selection of product - both book and non-book - together with an exceptional customer experience, we will differentiate Borders from others in the marketplace.

"The customer research we have gathered will inform these changes and ultimately redefine the Borders brand going into 2011 and beyond."

New Loyalty Program with a Focus on Customer Segmentation

As previously announced, today the company launched a new paid customer loyalty program -- Borders Rewards Plus with an annual fee of $20 -- as well as a free enhanced program. Borders is the only major bookseller to offer both a paid and free program. In addition, the company is using segmentation to drive customer engagement and sales through e-mails that include targeted discounts as well as personalized content such as specific title recommendations and local event notifications. Nearly 40 million people have signed up for the program since it originally launched in 2006.

Conference Call Today, Sept. 1 at 10 a.m. Eastern

Management will hold a conference call today at 10 a.m. Eastern. This call will be webcast by Thomson Financial and can be accessed at www.bordersgroupinc.com. A replay will be accessible on the Web site through Sept. 15. In addition, a replay phone service will be available toll-free at (800) 642-1687, passcode 91309569; or for international calls at (706) 645-9291, passcode 91309569. The phone service will be available through Sept. 15 until 11:59 p.m. Eastern.

About Borders Group

Headquartered in Ann Arbor, Mich., Borders Group, Inc. (NYSE:BGP) is a leading specialty retailer of books as well as other educational and entertainment items. The company employs approximately 19,500 throughout the U.S., primarily in its Borders® and Waldenbooks® stores. Online shopping is offered through borders.com. Find author interviews and vibrant discussions of the products we and our customers are passionate about online at facebook.com/borders, twitter.com/borders and youtube.com/bordersmedia. For more information about the company, vist http://www.borders.com/investors.

Safe Harbor Statement

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. One can identify these forward-looking statements by the use of words such as "expects," "planning," "preparing," "possibility," "opportunity," "goal," "will," "may," "intend," "anticipates," "working toward" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address matters such as the company's future financial condition and performance (including earnings per share, liquidity, cash flows, debt levels, market share growth and other sales information, inventory levels and capital expenditures), its strategic initiatives such as the expansion of product categories, including eBook content and eReaders and contemplated strategic partnerships. These statements are subject to risks and uncertainties that could cause actual results and plans to differ materially from those included in the company's forward-looking statements.

These risks and uncertainties include, but are not limited to, consumer demand for the company's products, particularly during the holiday season, which is believed to be related to general economic and geopolitical conditions, competition and other factors; the availability of adequate capital - including vendor credit - to fund the company's operations and to carry out its strategic plans; adverse litigation results or other claims; the performance of the company's information technology systems; with respect to eBook content and eReaders, the availability to the company of anticipated content levels and a variety of competitive devices; and, with respect to strategic partnerships, the ability to identify and reach agreements with acceptable partners.

The company's periodic reports filed from time to time with the Securities and Exchange Commission contain more detailed discussions of these and other risk factors that could cause actual results and plans to differ materially from those included in the forward-looking statements, and those discussions are incorporated herein by reference. The company does not undertake any obligation to update forward-looking statements.

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Borders Group, Inc. Financial Statements
(amounts in millions, except per share amounts)
Unaudited
Sales and Earnings Summary

Quarter Ended
-------------
July 31, August 1,
2010 (1) 2009 (1)
------- -------
Sales $526.1 $594.2
Other revenue 4.3 7.6
--- ---
Total revenue 530.4 601.8
Cost of goods sold, including
occupancy costs 428.8 465.5
----- -----
Gross margin 101.6 136.3
Selling, general and
administrative expenses 139.3 162.0
Asset impairments and other
writedowns - -
--- ---
Operating loss (37.7) (25.7)
Interest expense 9.0 5.2
Warrant/put expense 4.5 14.7
--- ----
Total interest expense 13.5 19.9
---- ----
Loss before income taxes (51.2) (45.6)
Income taxes (benefit) 0.4 (0.5)
--- ----
Loss from continuing
operations $(51.6) $(45.1)
------ ------
Income (loss) from operations
of discontinued operations
(net of tax) (2.9) (0.5)
---- ----
Gain from disposal of
discontinued operations (net
of tax) 7.8 -
--- ---
Gain (loss) from discontinued
operations (net of tax) 4.9 (0.5)
--- ----
Net loss $(46.7) $(45.6)
====== ======

Basic EPS from continuing
operations $(0.74) $(0.75)
Basic EPS from discontinued
operations $0.07 $(0.01)
Basic EPS including
discontinued operations $(0.67) $(0.76)
Basic weighted avg. common
shares 69.5 60.2
Comparable Store Sales
----------------------
Bookstores (6.8)% (17.0)%

Six Months Ended
----------------
July 31, August 1,
2010 (1) 2009 (1)
------- -------
Sales $1,046.1 $1,214.0
Other revenue 9.0 15.9
--- ----
Total revenue 1,055.1 1,229.9
Cost of goods sold, including
occupancy costs 852.3 956.9
----- -----
Gross margin 202.8 273.0
Selling, general and
administrative expenses 274.8 328.4
Asset impairments and other
writedowns - 0.1
--- ---
Operating loss (72.0) (55.5)
Interest expense 15.9 11.7
Warrant/put expense 27.9 63.8
---- ----
Total interest expense 43.8 75.5
---- ----
Loss before income taxes (115.8) (131.0)
Income taxes (benefit) 0.8 1.1
--- ---
Loss from continuing
operations $(116.6) $(132.1)
------- -------
Income (loss) from operations
of discontinued operations
(net of tax) (2.4) 0.5
---- ---
Gain from disposal of
discontinued operations (net
of tax) 8.2 -
--- ---
Gain (loss) from discontinued
operations (net of tax) 5.8 0.5
--- ---
Net loss $(110.8) $(131.6)
======= =======

Basic EPS from continuing
operations $(1.80) $(2.20)
Basic EPS from discontinued
operations $0.09 $0.01
Basic EPS including
discontinued operations $(1.71) $(2.19)
Basic weighted avg. common
shares 64.8 60.1
Comparable Store Sales
----------------------
Bookstores (9.1)% (14.8)%

Sales and Earnings Summary (As Percentage of Total Sales)

Quarter Ended
-------------
July 31, August 1,
2010 (1) 2009 (1)
------- -------
Sales 100.0% 100.0%
Other revenue 0.8 1.3
--- ---
Total revenue 100.8 101.3
Cost of goods sold, including
occupancy costs 81.5 78.3
---- ----
Gross margin 19.3 23.0
Selling, general and
administrative expenses 26.5 27.3
Asset impairments and other
writedowns - -
--- ---
Operating loss (7.2) (4.3)
Interest expense 1.7 0.9
Warrant/put expense 0.9 2.5
--- ---
Total interest expense 2.6 3.4
--- ---
Loss before income taxes (9.8) (7.7)
Income taxes (benefit) - (0.1)
--- ----
Loss from continuing
operations (9.8)% (7.6)%

Six Months Ended
----------------
July 31, August 1,
2010 (1) 2009 (1)
------- -------
Sales 100.0% 100.0%
Other revenue 0.9 1.3
--- ---
Total revenue 100.9 101.3
Cost of goods sold, including
occupancy costs 81.5 78.8
---- ----
Gross margin 19.4 22.5
Selling, general and
administrative expenses 26.3 27.1
Asset impairments and other
writedowns - -
--- ---
Operating loss (6.9) (4.6)
Interest expense 1.5 1.0
Warrant/put expense 2.7 5.2
--- ---
Total interest expense 4.2 6.2
--- ---
Loss before income taxes (11.1) (10.8)
Income taxes (benefit) - 0.1
--- ---
Loss from continuing
operations (11.1)% (10.9)%

(1) The results of Paperchase Products, Ltd. are reported as
discontinued operations.

Borders Group, Inc. Financial Statements
(dollars in millions)
Unaudited
Condensed Consolidated Balance Sheets

July 31, August 1, Jan. 30,
2010 2009 2010
---- ---- ----
Assets
Cash and cash equivalents $25.1 $32.3 $17.9
Merchandise inventories 798.2 868.3 854.1
Other current assets 57.1 58.5 66.1
Deferred income taxes - - 1.1
Current assets of discontinued
operations - 45.9 39.5
Property and equipment, net 339.0 426.2 372.8
Other assets and deferred charges 51.1 40.7 35.9
Noncurrent assets of discontinued
operations - 25.6 28.2
--- ---- ----
Total assets $1,270.5 $1,497.5 $1,415.6
======== ======== ========
Liabilities and Stockholders' Equity
Short-term borrowings and current
portion of long-term debt $231.2 $281.3 $275.4
Trade accounts payable 348.5 401.4 345.1
Other current liabilities 240.7 271.8 284.7
Current liabilities of discontinued
operations - 11.2 12.9
Long-term debt 56.0 6.3 6.6
Other long-term liabilities 360.7 382.9 325.6
Long-term liabilities of
discontinued operations - 5.7 7.0
--- --- ---
Total liabilities 1,237.1 1,360.6 1,257.3
Total stockholders' equity 33.4 136.9 158.3
---- ----- -----
Total liabilities and stockholders'
equity $1,270.5 $1,497.5 $1,415.6
======== ======== ========

Certain reclassifications have been made to conform to current year presentation.

Store Activity Summary

Quarter Ended Six Months Ended
------------- ----------------
July August July August
31, 1, 31, 1,
2010 2009 2010 2009
--- ---- --- ----

Beginning number of
stores 680 894 686 904
Openings 1 - 1 1
Closings (2) (8) (8) (19)
--- --- --- ---
Ending number of
stores 679 886 679 886
--- --- --- ---
Ending square footage
(in millions) 13.2 14.0 13.2 14.0
---- ---- ---- ----

Year Ended
----------
January 30,
2010
----

Beginning number of
stores 904
Openings 1
Closings (219)
----
Ending number of
stores 686
---
Ending square footage
(in millions) 13.2
----

Borders Group, Inc. Financial Statements
(dollars in millions)
Unaudited
Condensed Consolidated Statements of Cash Flows

Quarter Ended
-------------
July 31, August 1,
2010 2009
--------- ----------
CASH PROVIDED BY (USED FOR):
Loss from continuing operations $(51.6) $(45.1)
OPERATIONS
Adjustments to reconcile loss from
continuing operations to operating
cash flows:
Depreciation 19.1 24.5
Loss on disposal of assets 0.6 0.5
Stock-based compensation cost 0.2 0.7
Increase in warrant liability 2.2 14.7
Change in other long-term assets,
liabilities and deferred charges (3.2) (0.7)
Write-off of intangible asset - -
Asset impairment and other writedowns - -
Decrease in inventories 19.3 4.7
Increase in accounts payable 10.2 33.2
Change in current assets and current
liabilities (8.6) 2.3
---- ---
Net cash provided by (used for)
operating activities of continuing
operations (11.8) 34.8
----- ----
INVESTING
Capital expenditures (7.7) (1.2)
Proceeds from the sale of
discontinued operations 31.2 -
---- ---
Net cash (used for) provided by
investing activities of continuing
operations
23.5 (1.2)
---- ----
FINANCING
Net repayment of credit facility (18.3) (38.9)
Repayment of prior term loan
financing - -
Proceeds from the issuance of short-
term debt - -
Proceeds from the issuance of long-
term debt - -
Deferred financing costs paid (0.3) -
Repayment of capital lease
obligations (0.2) (0.5)
Repayment of short-term debt (2.8) -
Repayment of long-term debt (22.2) -
Issuance of common stock 0.1 (0.1)
Equity transaction 25.0 -
---- ---
Net cash (used for) provided by
financing activities of continuing
operations (18.7) (39.5)
----- -----
Net cash provided by (used for)
discontinued operations 5.7 0.6
--- ---
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1.3) (5.3)
---- ----
Cash and cash equivalents at
beginning of period 26.4 37.6
---- ----
Cash and cash equivalents at end of
period $25.1 $32.3
----- -----

Six Months Ended
----------------
July 31, August 1,
2010 2009
--------- ----------
CASH PROVIDED BY (USED FOR):
Loss from continuing operations $(116.6) $(132.1)
OPERATIONS
Adjustments to reconcile loss from
continuing operations to operating
cash flows:
Depreciation 38.7 51.0
Loss on disposal of assets 0.7 0.5
Stock-based compensation cost 0.2 0.1
Increase in warrant liability 25.6 51.9
Change in other long-term assets,
liabilities and deferred charges (5.3) (12.2)
Write-off of intangible asset - 16.2
Asset impairment and other writedowns - 0.1
Decrease in inventories 55.9 26.5
Increase in accounts payable 3.4 54.3
Change in current assets and current
liabilities (35.0) (17.6)
----- -----
Net cash provided by (used for)
operating activities of continuing
operations (32.4) 38.7
----- ----
INVESTING
Capital expenditures (10.5) (3.1)
Proceeds from the sale of
discontinued operations 31.2 -
---- ---
Net cash (used for) provided by
investing activities of continuing
operations
20.7 (3.1)
---- ----
FINANCING
Net repayment of credit facility (9.5) (46.4)
Repayment of prior term loan
financing (42.5) -
Proceeds from the issuance of short-
term debt 10.0 -
Proceeds from the issuance of long-
term debt 80.0 -
Deferred financing costs paid (24.4) -
Repayment of capital lease
obligations (0.4) (0.6)
Repayment of short-term debt (2.8) -
Repayment of long-term debt (22.2) -
Issuance of common stock 0.4 (0.4)
Equity transaction 25.0 -
---- ---
Net cash (used for) provided by
financing activities of continuing
operations 13.6 (47.4)
---- -----
Net cash provided by (used for)
discontinued operations 5.3 0.5
--- ---
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7.2 (11.3)
--- -----
Cash and cash equivalents at
beginning of period 17.9 43.6
---- ----
Cash and cash equivalents at end of
period $25.1 $32.3
----- -----

Borders Group, Inc. Disclosures Regarding Non-GAAP Financial
Information
(dollars in millions, except per share amounts)
Unaudited
We disclose two measures of operating performance within this news
release, including (i) adjusted EBITDA and (ii) debt net of cash,
both of which are considered non-GAAP measures within the meaning
of Regulation G of the Securities and Exchange Commission and which
are not measures of operating performance calculated in accordance
with GAAP. We believe excluding certain recurring non-operating
items, as detailed in the following tables, from our financial
results provides investors with a clearer perspective of the current
underlying operating performance of the company, a clearer
comparison to current period results and greater transparency
regarding supplemental information used by management in its
financial and operational decision-making. We use these non-GAAP
financial measures as an internal measure of business operating
performance, to establish operational goals and to analyze trends.
A reconciliation of each non-GAAP measure disclosed in this news
release to its most comparable measure calculated in accordance with
GAAP follows below.
(i) Loss from continuing operations is the financial measure
calculated and presented in accordance with GAAP that is the most
comparable to adjusted EBITDA. The table below reconciles adjusted
EBITDA to loss from continuing operations.

Quarter Ended Six Months Ended
------------- ----------------
July 31, August 1, July 31, August 1,
2010 2009 2010 2009
--------- ---------- --------- ----------
Reconciliation of
adjusted EBITDA
-----------------
Loss from continuing
operations $(51.6) $(45.1) $(116.6) $(132.1)
Adjustments to
reconcile loss from
continuing
operations to
adjusted EBITDA:
Income taxes 0.4 (0.5) 0.8 1.1
Total interest
expense 13.5 19.9 43.8 75.5
Depreciation 19.1 24.5 38.7 51.0
---- ---- ---- ----
EBITDA (18.6) (1.2) (33.3) (4.5)
Consulting,
professional and
other fees (Gross
margin and SG&A) 2.4 4.7 2.9 8.9
Store closure and
related costs
(Gross margin and
SG&A) 4.2 0.9 6.2 0.7
Severance and other
compensation costs
(Gross margin and
SG&A) 2.7 1.6 3.6 2.0
Asset impairments
and other
writedowns (Asset
impairments) - - - 0.1
--- --- ---
Adjusted EBITDA $(9.3) $6.0 $(20.6) $7.2
----- ---- ------ ----

(ii) Short-term borrowings and the current portion of long-term debt, long-term debt and cash and cash equivalents are the measures calculated and presented in accordance with GAAP that are the most comparable to debt net of cash. The table below reconciles debt net of cash to short-term borrowings and the current portion of long-term debt, long-term debt and cash and cash equivalents.

July 31, August 1,
2010 May 1, 2010 2009
--------- ----------- ----------
Reconciliation of debt net of cash
----------------------------------
Short-term borrowings and current
portion of long-term debt $231.2 $251.9 $281.3
Long-term debt 56.0 78.1 6.3
---- ---- ---
Total debt 287.2 330.0 287.6
Less: cash and cash equivalents 25.1 26.4 32.3
---- ---- ----
Debt net of cash $262.1 $303.6 $255.3
------ ------ ------

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Source: Borders Group, Inc.

CONTACT: Investor Contact: Glen Tomaszewski, +1-734-477-4750, or Media
Contact: Mary Davis, +1-734-477-1374, both of Borders

Web Site: http://www.bordersgroupinc.com/

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