From June 4th Billboard Magazine

Category Hurts Financial Results At Borders, Barnes & Noble
Ed Christman

Dateline: NEW YORK

Borders Group, the book merchant with the strongest exposure to music, had the weakest fiscal first quarter of the three publicly traded book chains that reported results the week of May 16.

In fact, looking at the results from Ann Arbor, Mich.-based Borders Group, New York-based Barnes & Noble and Florence, Ala.-based Books-a-Million, it is clear that each chain's financial gain was in inverse proportion to its exposure to music.

While Barnes & Noble and Books-a-Million were able to eke out a profit, not so for Borders, which lost $5.3 million, or 7 cents per share, on sales of $853 million in the three months ending April 23. Those results were down from the prior first quarter, when Borders Group generated $2.3 million in net income, or 3 cents per diluted share, on sales of $838.1 million.

Borders Group runs 1,244 outlets, including 702 Waldenbooks and 81 international stores. Its 461 Borders Books & Music outlets had a 0.7% decline in comparable-store sales; within that, music was the big loser, with a 13% comparable-store sales drop.

Music accounts for 14% of Borders Group sales, or $117.3 million in the first quarter. But the only divisions that carry music are its U.S. and international superstores. Billboard estimates that for those stores, music comprises 16%-17% of revenue. However, the chain is downsizing its commitment to music, according to comments made by Borders Group executives during a conference call.

Meanwhile, Barnes & Noble—which Billboard estimates derives 7%-8% of its revenue from music—reported net income of $9.9 million, or 14 cents per diluted share, on sales of $1.1 billion in the three months ending April 30. But profits were down from the prior first quarter, when a gain of nearly 6 cents per share—related to the spinoff of the GameStop chain—allowed the company to post $11.5 million in net income, or 17 cents per diluted share, on sales of $1.06 billion.

Barnes & Noble carries music in 433 of its 671 superstores and also runs 150 B. Dalton stores, none of which carry music. The company posted comparable-store sales gains of 2.2%.

Books-a-Million, which has the smallest exposure to music of the three publicly traded book chains, managed to outpace Barnes & Noble, posting a 3.7% increase for its fiscal first quarter, also ending April 30.

During that period, Books-a-Million produced net income of $1.06 million, or 6 cents per diluted share, on sales of $113 million. While same-store sales were up, net income and total sales were down from the prior first quarter, when net income was $1.23 million, or 7 cents per diluted share, on sales of $107.9 million.

Books-a-Million operates 207 stores, and only about five of them carry music, which is racked by Anderson Merchandisers. The company occasionally carries budget music promotions on an in-and-out basis.

Borders Group CEO Greg Josefowicz said in a statement that the company's trade-book sales, though strong, were not enough to compensate for declines in other categories—particularly music, "where we have a greater structural challenge."

In a conference call with Wall Street analysts, Josefowicz added that DVD continued to grow but "did not do its usual job in offsetting weakness in music." He reported that while music was down 13% for the quarter, in the period's last few weeks the decline appeared to accelerate to about 16%.

"We anticipated the decline in music, [but] not the high nature of the decline," he said.

During the call, Borders executives were continually asked about plans to downsize music, and Josefowicz said that as the company builds new outlets and remodels existing superstores, music is getting a smaller imprint in terms of space and inventory. But Borders executives pointed out that new, taller racks carry more music than current fixtures, so they reduce space while maintaining selection.

"In many of our remodels and one-offs," Josefowicz said, "we have accelerated and gone beyond what we anticipated the [music] decline curve to be, and with some experimentation of going way beyond, it escalates the decline [of music]. The key for us is not necessarily to manage the space down, but it's more focused on the effective redeployment of the space and trying to find the right combination of product and placement that drives the other categories in sales."

In a report to investors, Matt Fassler, an analyst with New York-based Goldman Sachs, said that until Borders Group "successfully addresses music, results will be under pressure."

Fassler told Billboard: "It's likely that Borders will have to make some difficult decisions down the road to contend with the reality of market share losses in a declining category. At some point, that is likely to mean a more dramatic reduction in space and inventory allocated to music."

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