Updated: 03/27/2002

Borders executives are quick to assert that funds aren't available for across-the-board improvements to wages and benefits, but those assertions are backed with the sketchiest of explanations. Shopworn homilies are offered: discourses on the value of employee-ownership, entrepreneurial culture, and the limitations of retail economics.

These explanations of the "realities of retail economics" are apt to omit as much relevant information as they contain: when justifying the outlay of company profits towards the creation of new stores, little mention is made of alternative sources of financing, like the company's credit facility; when presenting the profit limitations of fixed-price products, little mention is made of the operational efficiencies that result from fixed-pricing; and with regard to the company's budget, it is presented as if it were a closed system, with a fixed income derived entirely from sales, and little mention is made of stock market capitalization, accounting depreciations, cash flows, or credit facilities.

Within stores that have conducted union campaigns, and in broader company-wide communications, store clerks have repeatedly been challenged to provide details regarding budgeted sources of wage and benefit improvements. These questions are meant as rhetorical traps: store clerks are not expected to possess the "expertise" or the relevant documentation to make informed judgments regarding corporate finance, and any clerk who attempts to argue on this unfamiliar ground is at a distinct disadvantage. It is impossible to prove or disprove--within the context of a mere discussion--that BGI can afford a wage increase. The only remedy to Borders credibility gap in this regard is the financial disclosure mandated by law during union contract negotiations.

Nevertheless, with those conditions in mind, a foolish and/or intrepid clerk may choose to tangle with corporate finance on its own terms. What follows are a few guidelines for clerks who are called upon to come up with budget allocations:

Year 2001 Performance

As reported Jan. 31, 2002, Borders Group achieved record annual consolidated sales in 2001, of $3.39 billion, an increase of 5.1% over the comparable period in fiscal 2000.

Net income more than doubled for the full year. The company's overall financial position strengthened materially because of strong cash flow. Net cash on hand at the end of 2001 was $106.9 million compared to net debt a year ago of $85.3 million, which represents an improvement of $192.2 million.

Profits --The Borders Group achieved a 3.2% profit margin ("excluding unusual items" - according to BGI's press release) in 2001--that is, for each $100 dollars in sales, the company kept $3.20 (or $109,000,000 total) after it paid wages, bought books, paid taxes, opened stores, etc.

Loans--Borders Group finances its operation and expansion with loans made from two credit agreements: a $472.8 million multicurrency credit agreement, and a $175 million lease financing agreement. While Borders won't use these loans to pay its employees, it can and does direct them towards new store openings and other expenses, freeing sales income for other expenses.

Cash Flows--Profits aren't the whole picture. Another important measure of a company's strength is the cash generated by its operations. Cash flows are generated by a complex interaction of profits, expenses, taxes, inventories, depreciation credits, amortizations, and restructuring provisions. Borders Group's net cash provided by operations in 2001 was $106 million, compared to a net debt of $85 million in 2000.

The Stock Market --The Borders Group is authorized to issue 200,000,000 shares of common stock. As of this writing, 81,000,000 shares are outstanding. Borders can sell more shares to raise money.

Budget Emphasis--It has been suggested that an increased allocation to wages and benefits entails the elimination of other areas of the budget, like advertising, store openings, etc. That is hyperbole. As noted above, corporate finance is rather complex. There are many ways to slice a $3.4 billion pie. You don't have to toss entire slices away. Less money for a budget expense is not the same as no money for it. Incremental adjustments can be made to each of the expenses.

That's plenty of room for intelligent people to apply their training and come up with new solutions.

Some business expenses are fixed and aren't amenable to adjustment. Also, there are restrictions on what Borders can do with its loans and with its stock. For the most part, however, both expenses and income are flexible, and in some cases volatile. When BGI claims that its financial hands are tied, don't believe it until they show you the rope.