Waldenbooks and rising product costs kept a lid on

Borders Group's

(BGP)

fourth-quarter earnings.

The books and music vendor posted earnings of $106.2 million, or $1.32 ashare in its quarter ended Jan. 26. In the year-ago quarter, Bordersearned $109.3 million, or $1.32 a share.

The company's per share earnings inthe just-completed quarter were boosted by a 3% decline in sharesoutstanding to 80.2 million.

The overall earnings decline came despite increased revenue. For thequarter, the company saw sales of $1.23 billion, up 1% from the year agoperiod.

Excluding the cost of store closures and asset impairments, Borderswould have earned $111.5 million, or $1.39 a share. On this basis, WallStreet analysts were expecting the company to earn $1.38 per share,according to Thomson Financial/First Call.

For its fiscal year, Borders earned $111.7 million, or $1.36 a share, on$3.49 billion in sales. In fiscal 2001, the company earned $87.4 million, or$1.06 per share, on sales of $3.39 billion.

Borders' fourth-quarter results were hurt in part by declining same-storesales. Such sales, which compare results at outlets open more than one year,declined 3% in the fourth quarter at the company's Borders chain, comparedwith the same period last year.

Even more dramatic was the decline of the company's Waldenbooks chain,where same-store sales dropped 6.1% in the quarter compared with the sameperiod a year ago. Overall sales at the mall-based bookseller fell 7.1% inthe quarter.

In the quarter, Borders also saw a significant drop in its gross profitmargin, which represents the difference between what it charges for its products and what it pays for them. In the quarter,Borders' gross margin dropped from $400.7 million, or 33.1% of totalrevenue, to $393.2 million, or 32% of revenue.

Although the company did control its marketing, administrative and storeoperating costs, it wasn't enough to make up for the drop in its profitmargin. Such sales and administrative expenses declined from $208.6 million,or 17.2% of sales, to $199.7 million, or 16.3% of sales.

Borders forecast that it will break even in the first quarter and willpost full-year 2003 earnings between $1.50 to $1.60 a share. The companyexpects to see a sales surge due to the new

Harry Potter

book, which isscheduled to be released in June.

Analysts have projected that Borders will earn $1.54 in its currentfiscal year, according to Thomson Financial/First Call.

Meanwhile, the company projects that its first quarter same-store salesresults will resemble those it posted in the fourth quarter. For the year,the company expects its Borders unit to post same-store sales betweenslightly negative to slightly positive, while it expects comparable-storesales at Waldenbooks to fall in the low single digits.

Borders closed 53 Waldenbooks stores in fiscal 2002 and expects to close40 to 50 more in the current year. At the end of fiscal 2002, Waldenbooksoperated 778 stores.