MAIN NEWS HEADLINES
March 23-30, 2006 Edition
Borders Reports
Modest Sales Gains
In 4th Quarter and 2005
ANN ARBOR, MI/3/16/06Borders Group, Inc. (NYSE: BGP) has reported final fourth quarter and full-year 2005 results for the period ended Jan. 28, 2006. Fourth quarter consolidated earnings per share were $1.78, which is up 9.9% over the same period last year. The earnings per share increase was driven by Borders domestic superstore comparable store sales of 2.5% in the fourth quarter and a lower share count from stock repurchases. For the full year, consolidated earnings per share were $1.42 compared to $1.69 earned in 2004.
“In the fourth quarter, we began to see the benefits of investments made in Borders stores and we learned where capital is best deployed to drive future returns,” said Chief Executive Officer Greg Josefowicz. “This year, we’ll continue to invest, much as we did in 2005, with a focus on our key book, cafe and gifts and stationery categories, and once again, all of our growth will emerge in the fourth quarter. Looking ahead to 2007, as the benefits of our investments are more fully realized, we expect consolidated earnings per share growth to be more in-line with our long-term goal for annual EPS increases in the mid teens.”
Consolidated Results
Borders Group achieved fourth quarter consolidated sales of $1.45 billion, an increase of 6.3% over 2004. For the full year 2005, consolidated sales were $4.03 billion, a 3.9% increase over the prior year. As previously announced, fiscal 2005 was a 53-week year with a fourth quarter of 14 weeks compared to 2004, which was a 52-week year with a fourth quarter of 13 weeks.
Fourth quarter net income was $119.1 million, which is down by 3.0% from $122.8 million a year ago. Gross margin as a percent of sales declined by 0.3% from 33.9% to 33.6% in the fourth quarter, due primarily to increased promotional discounts as well as de-leveraging of fixed occupancy costs within the Waldenbooks Specialty Retail segment. SG&A as a percent of sales increased by 0.7% from 19.0% to 19.7% in the fourth quarter, due primarily to de-leveraging of expenses within the Specialty Retail segment. Interest expense increased by $2.7 million as a result of stock repurchases and capital expenditures.
On a full-year basis, net income decreased by 23.4% from $131.9 million to $101.0 million. Gross margin as a percent of sales declined by 0.5% from 28.8% to 28.3% for the full year due to increased bestseller and promotional discounts. SG&A as a percent of sales increased by 0.7% from 22.9% to 23.6% in 2005, primarily to support strategic initiatives. Interest expense increased by $5.2 million, again due to stock repurchases and capital expenditures.
Borders Group continued to provide direct returns to shareholders in the form of dividends and stock repurchases. In 2005, the company repurchased 11.6 million shares of its common stock totaling $265.9 million. Capital expenditures were $196.3 million for the full year 2005 compared to $115.5 million in 2004, with the increase used primarily to fund strategic initiatives. As a result of these investments, debt, net of cash, totaled $130.9 million at year-end compared to cash and short-term investments net of debt of $143.2 million one year ago.
Domestic Borders Superstores
Fourth quarter sales at domestic Borders superstores were $938.7 million, an increase of 9.8% over the same period in 2004. For the year, sales at domestic Borders superstores increased by 4.7%, ending the year at $2.71 billion. Strong fourth quarter book sales led results with a comparable store sales increase of 6% in the category for the period. Music continued to decline in the fourth quarter, with an 11% decrease in comparable store sales compared to the same period last year. For the entire store, comparable store sales at domestic Borders superstores increased by 2.5% in the fourth quarter and by 1.1% for the full year.
As a result of the sales increase, net income in the fourth quarter was up over the prior year by 10.2% to $85.0 million and was up for the full year by 2.9% to $115.3 million. In the fourth quarter, the company opened nine new Borders superstores in the U.S., ending the fiscal year with a total of 473 total domestic locations.
International
For the fourth quarter, total sales in the International segment were $203.7 million, which is up by 10.0% compared to the same period a year ago. For the full year, total International sales were $576.4 million, which is up by 12.9% versus 2004. Excluding the impact of foreign currency translation, total International sales would have increased by 17.6% for the fourth quarter and by 14.4% for the full year.
Comparable superstore sales in the International segment were up by 0.9% for the fourth quarter and were up by 0.4% for the year in local currency. Net income for the International segment in the fourth quarter was $13.6 million, which is down by 5.6% from a year ago. For the full year, there was a net loss of $7.8 million in the segment compared to net income of $5.6 million a year ago. Results in the International segment were impacted by a challenging retail environment in the U.K., which improved somewhat in the fourth quarter. The UK represents approximately three-quarters of total International segment sales. Borders Group opened a total of five new International superstores in the fourth quarter of 2005, ending the year with a total of 55 locations outside of the US
Waldenbooks Specialty Retail
In the Waldenbooks Specialty Retail segment, comparable store sales decreased by 2.7% in the fourth quarter and by 2.4% for the full year. Total sales within the Waldenbooks Specialty Retail segment were down 4.9% for the fourth quarter to $312.3 million and were down by 4.5% for the year to $744.8 million. Net income for the segment dropped by 19.9% in the fourth quarter to $30.6 million and declined by 32.0% for the year to $28.2 million, primarily attributable to declining sales. Borders Group closed 27 Waldenbooks Specialty Retail segment stores in the fourth quarter and 50 stores for the year, ending fiscal 2005 with a total of 678 locations.
Non-Operating Adjustments
All net income and earnings per share figures reported here include the impact of non-operating adjustments, which for the fourth quarter of 2005 totaled an after-tax charge of $0.09 per share compared to $0.05 a year ago. For the year, non-operating adjustments constituted an after-tax charge of $0.15 compared to $0.05 a year ago. Both the fourth quarter and full year 2005 charges are primarily comprised of asset write-offs and accelerated depreciation costs related to store remodels.
Q1 2006 Outlook
Management projects a loss of $0.20 to $0.30 per share for the first quarter compared to a loss of $0.07 in the first quarter of 2005. The increased loss versus last year is partly attributed to costs associated with the nationwide launch of an enterprise-wide customer loyalty program and the planned second-quarter opening of a new distribution center. The projection includes the impact of non-operating adjustments, expected to be an after-tax charge of $0.02 to $0.03 per share.
Comparable sales for Borders domestic superstores are expected to increase in the low single digits.
Comparable sales for Waldenbooks Specialty Retail stores are expected to decline in the low to mid single digits.
Comparable sales for International superstores are expected to be flat to down slightly.
Full Year 2006 Outlook
Management projects that full year 2006 consolidated earnings per share will range from $1.42 to $1.60, which is flat to up 13% over 2005 with all of this growth expected in the fourth quarter. This projected range includes the impact of non-operating expenses, expected to be an after-tax charge of $0.10 to $0.15 per share.
Comparable sales for Borders domestic superstores are expected to increase in the low single digits.
Comparable sales for Waldenbooks Specialty Retail stores are expected to decline in the low to mid single digits.
Comparable sales for International superstores are expected to increase in the low single digits.
