Borders 2nd Quarter-Cash Flow Improves-But Sales Decline

August 28, 2008
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August 28 – September 4, 2008 Edition

Borders 2nd Quarter
Cash Flow Improves;
But Sales Decline

ANN ARBOR, Mich/8/28/2008–Borders Group, Inc. on Tuesday this week reported results for the second quarter, ended Aug. 2, 2008. The company generated a second quarter loss from continuing operations of $11.3 million or $0.19 per share. But this was an improvement over the same period last year when Borders Group recorded a loss of $18.1 million or $0.31 per share.

In the first half of the year, operating cash flow from continuing operations improved by $195.7 million. The company generated operating cash of $50.7 million from continuing operations in the first half of the year compared to operating cash used of $145 million in the same period a year ago with the improvement due to tighter management of inventory and other working capital. Inventory from continuing operations decreased at cost by $181.7 million in the second quarter compared to the same period last year. Debt — including the prior-year debt of discontinued operations — was reduced by approximately 37% or $272.7 million at the end of the second quarter to $465.7 million, which compares to $738.4 million for the same period a year ago. The debt reduction was driven primarily by improved management of inventory and other working capital, lower capital expenditures, and proceeds from the previously announced sale of the company’s Australia/New Zealand/Singapore businesses.

Total consolidated sales from continuing operations in the second quarter, at $749.2 million, were down 6.9% over a year ago. At Borders domestic superstores, comparable store sales for the second quarter decreased by 8.9%, a result significantly impacted by comparison to the same period last year when the final book in the Harry Potter series was released. Excluding prior-year sales of the Harry Potter book, comparable store sales at Borders domestic superstores would have declined by 5.1% in the second quarter. The music category continued to experience negative sales trends resulting from declines in overall demand, and as planned, a reduction in inventory and floor space devoted to the category. Factoring out music and the impact of Harry Potter, Borders domestic superstore same-store sales in the second quarter would have declined by 3.0%.

In the Waldenbooks Specialty Retail segment, comparable store sales in the second quarter decreased by 7.0% over the same period a year ago. Excluding Harry Potter, same-store sales in the Waldenbooks segment would have declined by 1.4% for the quarter.

All earnings and loss figures presented throughout this news release are provided on a GAAP basis unless otherwise stated.

"We have not only improved profitability, but also substantially reduced debt, improved cash flow and significantly strengthened our balance sheet," said Borders Group Chief Executive Officer George Jones. "Our focus on expense reduction, inventory management and improved gross margin is clearly working, and we have managed to show substantial improvement in a very difficult retail environment. We will maintain this discipline and continue to manage the company prudently while also addressing the need to improve the top line."

Consolidated Q2 Results

Borders Group achieved second quarter consolidated sales from continuing operations of $749.2 million, a decrease of 6.9% over 2007. As stated, the second quarter loss from continuing operations improved to $11.3 million or $0.19 per share compared to $18.1 million or $0.31 per share a year ago. The improvement was due primarily to expense reductions, lower interest expense and a tax benefit. Excluding non-operating adjustments, the second quarter loss from continuing operations improved to $10.5 million or $0.18 per share from $12.1 million or $0.21 per share a year ago.

Consolidated gross margin from continuing operations as a percent of sales decreased by 0.8% from 25.2% to 24.4% in the second quarter as the negative impact of de-leveraging occupancy costs more than offset the gross margin benefit of a favorable sales mix and lower promotional discounts. Excluding occupancy, second-quarter consolidated gross margin from continuing operations would have increased by 0.9% compared to the prior year.

As a percent of sales, SG&A from continuing operations improved by 0.2% from 27.5% to 27.3% in the second quarter due to expense reduction initiatives. SG&A dollar expenses declined by $16.7 million in the second quarter compared to the same period last year. The company remains on-track to deliver its goal of reducing annual expenses by $120 million beginning in 2009, with half of that reduction to be achieved this fiscal year.

At the end of the second quarter, year-to-date capital expenditures from continuing operations were $54.1 million compared to $66.6 million a year ago. Debt-including discontinued operations- was reduced by $272.7 million to $465.7 million at the end of the second quarter compared to $738.4 million for the same period a year ago. In the second quarter, inventory from continuing operations was reduced by 14.3% — or $181.7 million at cost — compared to last year.

Domestic Borders Superstores

Total second quarter sales at domestic Borders superstores were $614.5 million, a decrease of 6.7% over the same period in 2007. As stated, comparable store sales decreased by 8.9% for the period compared to last year. Excluding Harry Potter, same-store sales in the segment decreased by 5.1% in the second quarter. Excluding Harry Potter and the music category, same-store sales declined by 3.0% for the quarter compared to one year ago. The book category overall was down 2.5% in the second quarter excluding Harry Potter on a same-store sales basis. Bestselling titles included "Breaking Dawn," "The Last Lecture," "The Shack," "Audition" and "When You Are Engulfed in Flames." Categories that performed well included Bargain and Children’s.

Borders superstores reported an operating loss of $7.7 million in the second quarter compared to an operating loss of $2.9 million for the same period a year ago. The loss was a result of negative same-store sales results, which were partially offset by expense reductions and improved gross margin (excluding occupancy).

The company opened four new Borders superstores in the U.S. during the period — all of them new concept stores — and ended the second quarter with a total of 518 domestic superstore locations.

Borders.com

On May 27, Borders Group introduced its new Borders.com e-commerce site, consistent with the company’s strategic plan. A grand opening campaign was launched in mid-July to market the site with emphasis on the company’s over 28 million Borders Rewards loyalty program members. In the second quarter, Borders.com generated sales of $7.4 million. Borders.com results are included in the Domestic Borders Superstore segment.

Waldenbooks Specialty Retail

Excluding Harry Potter, comparable store sales decreased within the Waldenbooks Specialty Retail segment by 1.4% in the second quarter and decreased by 7.0% with Harry Potter. Total sales in the segment were down by 17.0% in the second quarter to $96.9 million, as the number of stores was reduced from 532 at the close of the second quarter 2007 to 468 at the end of the second quarter this year.

The second quarter operating loss for the Waldenbooks Specialty Retail segment was $7.7 million compared to $12.4 million in 2007 with the improvement primarily due to expense reduction initiatives and better gross margin performance (excluding occupancy).

International

With the second quarter 2008 sale of the company’s Australia/New Zealand/Singapore businesses and the 2007 sale of its U.K. and Ireland operations, Borders Group’s International segment now consists primarily of its Paperchase business, headquartered in London. Also included in the segment are the three Borders superstores in Puerto Rico and the company’s franchise operations in the U.A.E. and Malaysia.

The company has accounted for the sale of the Australia/New Zealand/Singapore businesses in the second quarter under discontinued operations.

In the second quarter, sales within the International segment (excluding franchise stores) totaled $30.4 million, which is up 3.8% compared to the same period a year ago. Excluding the impact of foreign currency translation, sales would have increased by 4.9%.

Non-Operating Adjustments

Consolidated net loss and earnings per share figures reported here include the impact of non-operating adjustments, which in the second quarter totaled a $0.8 million charge comprised of severance costs, store closure and relocation costs, professional fees related to the strategic alternatives process and amortization of debt issuance costs. These costs were offset by income related to the fair market value adjustment of the warrant liability and related tax benefit.

Discontinued Operations

As previously reported, Borders Group sold its Australia/New Zealand/Singapore businesses for $87.9 million (USD) plus a working capital payment expected to be received in the third quarter. Additional deferred payments of up to approximately $14 million (USD) will be paid to Borders Group on or about March 31, 2009 if certain performance targets are achieved. In the second quarter, the company recorded an after-tax gain of $2.6 million from the sale.

Strategic Alternatives Process

The previously announced strategic alternatives process relating to the company and to Paperchase continues as the company evaluates its alternatives.

Next Financial Release

Borders Group plans to issue third quarter financial results Nov. 25, 2008 after market close with a conference call for investors to follow at 8 a.m. Nov. 26, 2008.

About Borders Group

Headquartered in Ann Arbor, Mich., Borders Group, Inc. (NYSE: BGP), is a leading retailer of books, music and movies with more than 28,000 employees. Through its subsidiaries, the company operates more than 1,100 stores worldwide primarily under the Borders(R) and Waldenbooks(R) brand names and recently launched Borders.com for online shopping. For more information, visit www.borders.com/aboutus

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