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Borders Group Reports 4% Dip In Second Quarter

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August 31 – September 7, 2006 Edition

Borders Group

Reports 4% Dip

In Second Quarter

ANN ARBOR, MICH/8/22/06—Borders Group, Inc. reported a 4% decline in sales for the second quarter ended July 29, 2006, compared to the same period in 2005. Consolidated sales for the current quarter totaled $856.0 million. As projected, the company recorded a consolidated loss of $0.29 per share for the period.

Management expects a third quarter consolidated loss ranging from $0.60 to $0.75 per share, but in the fourth quarter consolidated earnings per share should be $1.80 to $2.00.

"Our investments will peak in the third quarter as we continue to remodel stores, improve infrastructure and build our loyalty program, while at the same time we ramp-up inventory and make other investments to prepare for the holiday selling season," said Borders Group Chief Executive Officer George Jones, who has recently joined the company. "Once these investments are behind us by the end of the third quarter, we expect to begin to benefit from them—as well as from improved sales trends in the fourth quarter—to end the year with positive momentum going into 2007."

The 4% decline was attributed primarily to weakness in bestsellers and cycling against last year’s release of the sixth Harry Potter book. The consolidated net loss increased to $18.4 million, compared to income of $1.3 million a year ago. Gross margin as a percent of sales declined by 2.0% in the second quarter from 25.9% to 23.9% due primarily to de-leveraging of occupancy costs driven by negative comparable store sales, distribution integration costs, and increased costs related to the Borders Rewards(SM) loyalty program. SG&A as a percent of sales was up 1.0% in the second quarter from 25.1% to 26.1% due to de-leveraging. Interest expense increased by $4.4 million to $7.7 million primarily due to higher debt levels resulting from capital expenditures, inventory investment and stock repurchases.

Borders Group continued to provide direct returns to shareholders in the form of dividends and stock repurchases. In the second quarter, the company repurchased 2.3 million shares of its common stock totaling $43.7 million, bringing the total for the year to 3.0 million shares totaling $61.4 million. Year to date, capital expenditures were $87.2 million compared to $85.2 million in 2005. Inventory, net of accounts payable, increased by $112.5 million over last year. As a result of these investments, over the past year, debt net of cash totaled $476.7 million at period-end compared to $125.3 million one year ago.