Booksellers
Survived
Technology & 9/11
By Patrick McKeough, editor
Wall Street Forecaster
The
past few years have been wild ones for bookstore stocks. In 1999
and 2000, investors worried that e-books and Internet retailers
would run these companies out of business. Last year, investors
worried that September 11 would empty the malls.
However, bookstores
have proved more resilient than pessimists guessed. We see these
two leaders as buys.
Barnes & Noble,
Inc. (NYSE BKS $29; WSSF Rating: Average) is the world's
largest book retailer. It operates 591 Barnes & Noble superstores
in 49 states. Superstores carry up to 175,000 book titles, and
feature in-store coffee bars and lounges. In 2001, superstores
accounted for 70% of total revenues.
The company also owns
305 B. Dalton Bookseller stores, mostly in suburban malls. Barnes
& Noble also has a 60% interest in GameStop, the largest
video game software retailer in the country with 1,038 stores,
and sells books over the Internet through 36%-owned barnesandnoble.com.
Revenues rose from
$2.8 billion in 1998 (fiscal years end January 31) to $4.9 billion
in 2002, or 15.0% compounded annually. The 1999 acquisitions
of software retailers Baggage's and Funco (both are now part
of GameStop) fuel much of this growth.
Profits before unusual
items fell from $64.7 million or $0.93 a share in 1998 to $54.8
million or $0.76 a share in 1999, but jumped to $98.1 million
or $1.38 a share in 2000. Profits fell to $40.4 million or $0.63
a share in 2001, but grew to $91.3 million or $1.28 a share in
2002.
In February 2002, the
company sold about 40% of GameStop to the public for $326 million.
Strong interest in new game machines from Nintendo and Microsoft
helped push GameStop's sales in fiscal 2002 to $1.1 billion,
up 48.2% from $758 million a year earlier. Same-stores sales
grew 32.0%.
GameStop used most
of the proceeds to repay debt owed to Barnes & Noble. Even
before the GameStop offering, Barnes & Noble's long-term
debt in fiscal 2002 fell to 0.5 times equity from 0.9 times equity
a year earlier. The extra cash probably cut long-term debt to
0.3 times equity.
Sales at barnesandnoble.com
in 2001 rose 8% to $404.6 million from $374.9 million a year
earlier. Barnes & Noble's share of its losses fell to $0.05
from $0.23 a share, mostly due to cost controls. The Internet
site added 3.3 million new customers in 2001, raising the cumulative
customer count to more than 11.2 million since the site's launch
in 1999. Customer acquisition costs also fell sharply in 2001,
to $14.73 a customer from $23.29 in 2000.
The company is also
planning to expand its publishing business, which accounts for
about 3% of its total sales. In 1999, it bought a 49% stake in
iUniverse.com, an Internet portal site that publishes e-books
by recognized authors and first-time writers. It also publishes
regular books using an on-demand printing method that greatly
cuts costs and the time it takes to bring a book to market.
Barnes & Noble is a buy.
Borders Group, Inc. (NYSE BGP $23; WSSF Rating: Average) is the world's second-largest bookseller. It operates 363 superstores in the U.S., as well as 22 overseas (mostly in the UK). It also operates 827 smaller Waldenbooks stores and 36 U.S.-based Books etc. stores. The superstores supply roughly two-thirds of Borders' revenues.
In the last five years, sales grew from $2.3 billion in 1998 (fiscal years end January 31) to $3.4 billion in 2002, or 10.3% compounded annually. Profits from continuing operations and excluding unusual gains and losses rose from $80.2 million or $0.98 a share in 1998 to $93.7 million or $1.17 a share in 2000.
Losses from its online business and a failed toy store chain acquired in 1999 cut Borders' profits in fiscal 2001 to $73.8 million or $0.92 a share. Profits in 2002 jumped to $109.3 million or $1.32 a share, mostly due to cost cuts and the disposal of its Internet operation.
Last August, Borders relaunched its struggling online business as a co-branded site with Internet bookseller Amazon.com. originally launched in 1998, Borders.com lost $57.4 million in its first three years.
Under the terms of the deal, Amazon now handles inventory, fulfillment and customer service. Amazon pays Borders a fee for every item purchased. The deal let Borders focus on its profitable retail stores.
Borders no longer sells books over the Internet. But its BordersStores.com site lets customers see if an item is available at a particular store. If so, the customer can reserve the item and pick it up later. The company also uses an in-store computer system called Title Sleuth that lets customers easily find specific titles. Book retailing is a highly competitive industry, and services like these help build customer loyalty.
The company's balance sheet is strong. It has $190.2 million in cash, up from $59.1 million a year earlier, and $49.7 million in long-term debt.
Like Barnes & Noble, Borders fell from $25 to $15 after 9/11. But the stock quickly recovered most of its losses. It now trades for 15.5 times the $1.48 a share it should earn in fiscal 2003. It also trades for 43.8% less than its fiscal 2002 sales per share of $40.95.
Borders is a buy for long-term gains.
Editor's Note: Patrick McKeough is editor of Wall Street Forecaster, 250 Liston Rd., Ste. 700, Buffalo, NY 14223, 1 year, 12 issues, $99. Hotline included.
