Borders Group CEO Discusses Q3 2010 Results - Earnings Call Transcript
Borders Group, Inc. (BGP)
Q3 2010 Earnings Call
December 9, 2010 4:30 pm ET
Executives
Scott Henry - EVP and CFO
Mike Edwards - President and CEO
Glen Tomaszewski - CAO
Analysts
Bill Armstrong - C.L. King & Associates
Presentation
Operator
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Good afternoon and welcome to the Borders Group Incorporated third quarter 2010 financial results conference call. (Operator Instructions) Now, I would like to turn the call over to Mr. Scott Henry, Borders Group Chief Financial Officer.
Scott Henry
Thank you, Stephanie. Good afternoon, everyone. I am here today with Mike Edwards, President and Chief Executive Officer of Borders Inc, and Glen Tomaszewski, our Chief Accounting Officer. Thank you for joining us on the call this afternoon.
Let me note that today's discussion may include forward-looking statements. These statements, among others, may include sales and earnings expectations and information related to corporate initiatives. Please refer to the news release issued earlier this afternoon and to our most recently filed 10-Q for information relating to forward-looking statements, including factors that could cause actual results and plans to differ.
Before we begin the formal presentation of our results for the past quarter, let me turn the call over to Mike Edwards, our CEO for some initial comments.
Mike Edwards
Thank you, Scott. First, let me address the recent news contained in the SEC filing made by Pershing Square on December 6. In that filing, Pershing Square Capital, one of our largest shareholders states that's it's prepared to finance on mutually acceptable terms and offer to buy Borders to purchase all the equity securities of Barnes & Noble for either $16 per share in cash or a mix stock in cash consideration.
In response we have confirmed that Mr. Ackman of Pershing Square has shared with us his perspective that the business combination of Borders and Barnes & Noble could create significant synergy. We have also confirmed that Mr. Ackman has expressed his willingness to provide financing for such a transaction and we welcome his participation.
In addition, we noted that we have previously expressed to Barnes & Noble our interest in such a business combination and we look forward to continuing those discussions. With that said, we will now comment further on this call regarding the matter today.
Now, let me turn to a general overview of the quarter. Quarter ended October 30, 2010 is one which we began the transformation process of Borders, as we start to implement to our new strategy in business. We are confident that the process we are undertaking is strategically responsive to the challenges facing our industry. However, we are not far enough along in the process for to have meaningful positive effect on our last quarter's performance.
I'll elaborate on our strategy a little later in the call in greater detail. I now want to turn the presentation about our past quarter back to Scott, and I will return later to elaborate more on the strategy.
Scott Henry
Thank you, Mike. The quarter among other things reflected challenges on the topline. Specifically, our bookstores had negative comp store sales of 12.6% in the third quarter, largely due to the performance of our trade book category. Digital devices and our Kids Toys and Games categories outperformed the rest of the store, however, and generated positive comps for the quarter of 93.6% and 6.6% respectively. Transaction comps were down 9% and average ticket was down 4.1%.
Borders.com sales were lower than a year ago for the quarter by 8.6% or $1.1 million. With that said, we made substantial improvements to Borders.com during the quarter, including the addition of new product categories such as used books, textbook rentals, posters and craft supplies. As a result, we did not engage in every promotional activity during the quarter in anticipation of the relaunch of the site, which was announced on November 15.
The gross margin rate for the quarter was 310 basis points lower than a year ago. The largest driver of this decline was higher occupancy cost of 140 basis points due to cost deleverage. Shrink continue to provide a lift to the gross margin rate, however, improving by 80 basis points over last year, as we continue to benefit from improved store level execution and compliance. Promotional spending was 50 basis points lower than a year ago, and we continued to move away from the in-stores promotions and focus discount spend on promotions designed to increase traffic in to our stores.
With regard to SG&A, our continued efforts to simplify and streamline our business, as well as our reduced store count helped us achieve a reduction of SG&A cost compared to the prior year of 13.1%. As a percentage of sales, SG&A increased 1.6%, however, due to cost deleverage, cost by the decline in comparable store sales.
The company did strategically increase spending during the quarter in key areas, including the launch of Borders Rewards Plus and the redesign of in-store signage to improve the shopability of our brick and mortar stores. Also impacting the quarter was the launch of our Area-e digital shops within our stores and we invested in store payroll and capital spending related to this initiative.
Although our operating results for the quarter were disappointing, we continue to focus on the following important financial initiatives. Enhancing the profitability of our existing stores is one of our key priorities. We are addressing this in two ways, through the end of the third quarter on year-to-date basis we completed lease buyouts and closed 10 stores which were diluted to our EBTIDA.
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