Turn the Page: A New Chapter(s) in Canadian Book Retailing

Although it has its naysayers, the company has no time to fend them off -- it's too busy watching revenues grow.
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VANCOUVER -- Canadians have long taken pride in the literary works of their sons and daughters. And in addition to swelling the pride of those north of the border, books of fiction and fact by the likes of

Margaret Atwood

,

John Kenneth Galbraith

,

Robertson Davies

and

Douglas Coupland

have also proven to be strong sellers.

Until recent years, however, Canadians haven't been nearly as smitten with their book retailers, many of which offered mediocre service, price and atmosphere.

That disenchantment with book peddlers has dissipated with the arrival of

Chapters

(CHP:Toronto), a made-in-Canada dynamo that has captured the hearts of the nation's reading public even as big Internet e-tailers such as

Amazon.com

(AMZN) - Get Report

battled for their wallets. The company, formed in 1995 by the merger of

Coles

and

Smithbooks

, operates stores from Newfoundland to British Columbia -- including 63 much-ballyhooed superstores.

With an emphasis on service and style, the nation's largest bookseller -- taking its cue from

Borders

(BGP)

-- is ushering in a new era of retailing in the country. Chapters' flagship stores have all the makings of a full-on consumer experience -- comfy chairs and sofas, music-listening stations and designer coffees to go, courtesy of in-house

Starbucks

(SBUX) - Get Report

outlets. Combine those amenities with competitive pricing, plus an enthusiastic staff, and the Chapters phenomenon strikes many Canadians as being, well, American.

Not that anyone's complaining -- except the competition. By taking its cues from the dynamic retail environment south of the border, Chapters' overwhelming success has contributed to the downfall of several smaller outfits, including

Duthie Books

, a longstanding Vancouver bookseller, which recently filed for bankruptcy.

The success is reflected in Chapters shares, which are currently trading at about C$26 ($17) range on the

Toronto Stock Exchange

. That's up an impressive 38% over the 52-week low of C$18.75. By comparison, the benchmark

TSE-300

index is up just 14.7% over the last year.

Chapters' critics, a group which includes few bookworms, accuse it of being a Trojan horse for

Barnes & Noble

(BKS) - Get Report

, which owns 7% of the chain and is the largest Yank investor in what is a homegrown operation. They worry other U.S. companies will try similar stealth invasions of Canada's business territory.

They may have a point. The chain's success is making it easier for American suitors to find their way past the Mounties at the border. In June,

Sequoia Capital

, the heavy-hitting Silicon Valley venture capital fund, announced it had taken an 11% stake in Chapters' online division. The money -- certainly not seen as contraband by customs agents -- couldn't have come at a better time. As the bookseller embarks on taking its spinoff public, the high-tech sugar daddy has invested $15 million, giving the upstart some dot-com credibility. Sequoia's other recent investments have included a $5 million position in

eToys

(ETYS)

and a $10 million stake in

MP3.com

(MPPP)

.

The sluggish market for IPOs during the past summer, however, has cooled enthusiasm for

Chapters Online

, which filed a preliminary prospectus on Aug. 5 and is expected to go public this fall. The unit's underwriting syndicate will be co-led by

CIBC World Markets

and

Yorkton Securities

.

The excitement that an e-commerce offspring would have stirred up six months ago is now, to the contrary, a thorn in Chapters' side -- nagging heavily on the company's stock.

When Chapters posted a fiscal first-quarter loss of C$9.4 million for the period ended July 3, compared with a C$3.3 million loss posted a year ago, it attributed some of its shortcomings to costs associated with the online division. The resulting testiness helped knock the shares from a 52-week high of C$36.50 on April 27.

One retail analyst, asking to remain anonymous, justifies investors' fears, pointing to revenue figures that don't compare favorably to those of Amazon.com during its early stages of growth.

And another question looms large: If Chapters is successful in driving consumers to their laptops and home computers to purchase books and CDs, will those online transactions cut into Chapters' core business of selling books face-to-face?

Still, the company doesn't have time to fend off naysayers -- it's too busy watching revenues grow. Chapters' e-superstores had sales of C$73 million for the first quarter, a 52% gain from the fourth quarter of the previous year. And revenue from the online division rose to C$3.7 million from C$1.5 million during the same time.

"We have made a significant investment in capital, marketing, development and management, driving Chapters Online to become Canada's premier e-commerce site," Chief Executive Lawrence Stevenson said in early August.

His words speak volumes. Amidst the back-and-forth debate over the company's future, one thing remains certain: This is one of the boldest Internet plays to come out of the Great White North yet. Chapters' aggressive move into e-commerce, like many of its initiatives, flies in the face of traditional Canadian moderation and caution. But from the beginning, this Johnny Canuck-come-lately has done things its own way.

Like it or not, the book giant's investors are faced with a new chapter -- one that just might write up a happy ending.