Borders Group, Inc. Q1 2010 Earnings Call Transcript

Borders Group, Inc. Q1 2010 Earnings Call Transcript
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Borders Group, Inc. (BGP)

Q1 2010 Earnings Call

May 27, 2010 10:00 am ET

Executives

Michael Edwards – Interim President, Chief Executive Officer

Mark Bierley – Chief Executive Officer

Analysts

John Bachman – Goldman Sachs

Presentation

Operator

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Welcome to the Borders Group, Inc. first quarter 2010 financial results conference call. (Operator Instructions) Now I would like to turn the call over to Mr. Mark Bierley, Borders Group CFO.

Mark Bierley

Good morning, everyone, and here today are Mike Edwards, Interim President and Chief Executive Officer of Borders Group. Thank you for joining both of us on the call this morning.

As always, I need to point out 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 morning and our most recently filed 10-K for information related to forward-looking statements including factors that could cause actual results and plans to differ.

With that, let me start by discussing the equity investment that we announced last week. As noted in the news release we issued on May 21, Ben LeBow invested $25 million in the company through a private purchase of 11.1 shares of the company’s common stock at a purchase price of $2.25 per share. We are extremely happy with the flexibility this investment, along with our recently completed debt refinancing, gives us in our efforts to strengthen our balance sheet.

Ben LeBow and Howard Lorber have joined the Board of Directors and Ben has been elected Chairman. We are extremely pleased to have both Ben and Howard on our Board and are looking forward to their contribution. Please refer to our recent 8-K filed with the Securities and Exchange Commission dated May 21, 2010 for further details on this transaction.

Now I want to touch briefly on our key financial priorities for the remainder of 2010. First, we are continuing to maximize the profitability of our stores. We have a number of stores, which are dilutive to our EBITDA. We intent to aggressively pursue lease buyouts from these stores. The buyout on these leases would, based on our assumptions, positively impact our long-term bottom line.

We’ve also created a comprehensive operational audit program to assess store level execution and controls designed to reduce shrink with a strong focus on stores that have historically seen high levels of loss.

Increasing the efficiency of our supply chain is another key priority for us in 2010. We’re currently analyzing alternatives for our supply chain including the benefits of increasing the amount of product that is shipped direct to our stores. Our overall goal is to reduce operating costs and to maximize the efficiency of our distribution capacity to reduce working capital requirements.

Finally, we’re maximizing the potential and profitability of Borders.com by making investments in both our upcoming digital bookstore powered by Kobo as well as in Borders.com to improve the overall customer experience.

Mike will discuss the progress we’ve made on executing our digital strategy as well as provide updates on all of our strategic initiatives in a minute. But before I turn it over to him, I’ll cover key aspects of our first quarter performance.

During the quarter, we continued to have a challenge on the top line. Specifically in the first quarter, our bookstores generated negative comp store sales of 11.4%. Our core categories excluding multi-media performed better, declining by 6.8%. Transaction comps were down 8% and average ticket was down 3.6% driven primarily by price per unit, as units per transaction were flat. Borders.com sales increased 34.7% in the first quarter.

Overall, for the company, inventory was down in the first quarter by 6.4% or $56.8 million compared to last year driven primarily by store closures. Excluding the effect of these store closures, inventory increased on a per store basis. Our in stock levels continue to outpace those of a year ago as we’ve invested inventory into broadening our assortment as well as adding new product in the kid and teen areas of our business.

Specific to gross margin, we had 50 basis points of improvement that was driven by initial markup resulting from shifting our product mix to higher margin goods including books, café, kids and gifts and stationary.

Promotional spending was flat compared to a year ago. Occupancy costs that were higher by 190 basis points due to cost deleverage and supply chain and freight costs that were higher by 110 basis points, due primarily to heavy return volume during the quarter.

We saw the benefit of our cost reductions during the quarter, and our SG&A was reduced by $30.9 million driven by store payroll, store expense, efficiencies as well as store closures and reduced corporate overhead costs.

Interest costs were up over the prior year given the higher cost of capital required by our recently completed financing arrangements. We continue to prudently manage capital expenditures, spending $5 million during the quarter. Spending was focused on developing our eBook store on Borders.com and on completion of the conversion of our small format floor system to that of our superstores. We expect full year capital expenditures to be flat with last year’s level.

That’s it for my comments. Now I’ll turn it over to Mike who will talk about our strategic path forward.

Michael Edwards

Thank you, Mark, and good morning everyone. We are extremely pleased to have the $25 million equity investment from Ben LeBow. This investment coupled with our company’s recently announced refinancing will strengthen our balance sheet and provide the necessary capital for funding the transformation of the Borders brand, which is believe must happen in order to affect a turnaround at Borders.

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