Bookstore
Operators
Surviving The Internet
By Patrick McKeough, editor & publisher
Wall Street Stock Forecaster
Barnes
& Noble and Borders have a lot in common. They're the world's
two biggest bookstore chains. Both have been trying to profit
from the Internet, and losing money. Both have gained nicely
for us in the past year Barnes & Noble has doubled
and Borders is up by a third. We still like both.
Barnes & Noble
(NYSE BKS $33 WSSFR Rating: Average) is the world's largest
book retailer. It operates 569 Barnes & Nobles superstores
and 339 B. Dalton mall-based stores. It also operates the largest
video-games chain in the U.S., with 978 Babbage's and Funco stores.
It owns 40% of online bookseller barnesandnoble.com, and it's
the top bookseller on America Online.
Barnes & Noble's
revenues rose at a compound annual rate of 12.3%, from $2.4 billion
in fiscal 1996 (years end January 31) to $4.4 billion in fiscal
2000. Sales should reach $4.7 billion in 2001. Most growth since
1999 was due to the acquisition of video game and software retailers
Babbage's and Funco. Profits before unusual items rose from $0.74
a share in 1996 to $0.93 a share in 1997, then fell to $0.76
in 1998. Profit jumped to $1.85 a share in 1999, but fell 23.2%
to $1.06 a share in 2000.
In the three months
ended May 5, sales grew 12.9%, to $1.0 billion from $894.3 million
a year earlier. Excluding a one-time costs, losses in the quarter
dropped to $0.12 a share from $0.14 a share. Same-store sales
at superstores grew 2.3%; same-store sales at video game outlets
jumped 13.2%. Profits should hit $1.61 a share this year, due
partly to better sales of video games.
The company's superstores
carry 60,000 to 175,000 titles, plus magazines, music, videos,
and computer software. They attract customers with in-house coffee
bars and lounge chairs. Superstores sales grew 12.3% in 2000,
to $3.2 billion from $2.9 billion a year earlier. They accounted
for 70% of 2000 revenues. On a same-store basis, sales grew 4.9%.
Sales from the video
game business jumped 37% in 2000, to $757.6 million from $553.0
million in 1999. On a same-store basis, however, sales dropped
by 6.7%. This was due mostly to delays in Sony's launch of its
new Playstation 2. Sales this year should gain due to better
availability of Playstation 2 game units and software. Sales
should also gain from the launch of new game consoles form Nintendo,
and also from Microsoft's new Xbox game machine.
Sales at barnesandnoble.com
rose 65% in 2000, to $320 million. The company's share of the
online unit's losses grew to $0.55 a share from $0.35 a year
ago, excluding unusual items. The online business is still investing
heavily to improve its distribution and customer service. In
2000, it had 7.3 million customers, up 80% over 1999. It may
become profitable by 2003.
Barnes & Noble is a buy.
Borders Group (NYSE BGP $19 WSSF Rating: Average) is the world's second-biggest bookseller. It has 355 Borders superstores and 869 smaller Waldenbooks store in the U.S. Overseas, it owns 14 superstores and 31 mall-based stores, mostly in the UK.
Sales grew at a compound annual rate of 10.5%, from $2.0 billion in fiscal 1997 to $3.3 billion in 2001 (fiscal years end January 31). Sales in fiscal 2002 should reach $3.7 billion, a 12.1% gain. At the end of January, the company had $59.1 million in cash and only $15.0 million in long-term debt. Profits from ongoing operations rose from $57.9 million or $0.70 a share in 1997 to $96.8 million or $1.21 a share in 2001, or 10.8% compounded.
There profit figures include results from Border's web site, Borders.com, which lost $18.4 million or $0.23 a share last year on sales of $27.4 million. They exclude costs from All Would Up, a specialty toy chain that Borders acquired in 1999. It lost $10.8 million in 2000. Borders shut the chain last year, and wrote off a non-cash charge of $19.4 million.
Border's web site has always trailed rivals Amazon.com and barnesandnoble.com. In April last year, Borders agreed to give control of its site to Amazon.com, which will re-launch Borders.com later this year, separate from Amazon.com. Amazon will handle inventory, fulfillment, web site content and customer service. It will pay Borders a fee for every item the site sells.
This lets Borders cut its online losses while retaining a web presence and focusing on its profitable retail outlets. Amazon has a similar deal with toy retailer Toys R Us.
Borders will also cut costs with an agreement signed in March 2001 with Ingram Book Group. Ingram will become Border's main provider of fulfillment services for special orders. Borders will absorb one-time charges totaling $15 million to $20 million. But the deal should raise Border's earnings by $0.02 a share this year, and $0.04 next year. This year's earnings should climb to $108 million or $1.38 a share.
Like Barnes & Noble, Borders is installing computer terminals in its stores to boost sales at its web site. It has joined with an online magazine seller, MegaMags, Inc., which will sell subscriptions to over 21,000 different magazines through Borders.com.
Borders is a buy for long-term gains.
Editor's Note: Patrick McKeough is editor of the Wall Street Stock Forecaster, 250 Liston Rd., Ste. 700, Buffalo, NY 14223 1 year, 12 issues, $US72.
