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Borders Sales-Lag; Amazon Relationship Ends

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MAIN NEWS HEADLINES
May 29 – June 5, 2008 Edition Borders Sales
Lag; Amazon
Relationship Ends

ANN ARBOR, Mich., 5/27/2008–Borders Group, Inc. (NYSE: BGP) today reported that consolidated sales were down by 1.0% to $784.7 million for the first fiscal quarter, ended May 3, 2008, compared to last year’s period.  At Borders domestic superstores, comparable store sales for the period decreased by 4.1%. Without the impact of music, same-store sales at Borders domestic superstores decreased by 1.7% for the quarter. Within the Waldenbooks Specialty Retail segment, comparable store sales decreased by 0.8% over the same period a year ago. Same-store sales in the International segment increased by 3.1% in the first quarter.

Cash flow from operations improved by $132.9 million for the quarter compared to a year ago due in large part to improved inventory management, which generated $88.9 million in cash in the first quarter. Inventory decreased by $188.4 million at cost from the same period a year ago. Debt was reduced by $130.9 million compared to the prior year, including the prior year debt of discontinued operations.

“As was the case with nearly every other retailer, the challenging overall consumer environment hampered sales performance in the first quarter.  I am pleased, however, that even within this difficult retail climate, we were able to manage inventory well, begin to aggressively reduce expenses, and end the quarter with better bottom line results than would have been expected in this type of environment,” said Borders Group Chief Executive Officer George Jones.  “In fact, we worked with a third party advisor to develop a plan to reduce our annual operating expenses by $120 million, giving Borders a new, more effective base operating model going forward. We expect to realize about half of these savings within the current fiscal year and the full amount in 2009. We also substantially improved cash flow and reduced debt in the first quarter–both of which are critical factors in achieving our long term financial goals–and as we announced in March, we completed financing to support our short term goals.  While we have seen an improvement in sales in recent weeks, we will continue to aggressively execute expense reductions and manage our business conservatively, putting us in a much better position for long term success.”

Management also announced earlier today that after seven years of being teamed with Amazon.com for e-commerce, the company has launched its own new e-commerce site–Borders.com. It is expected that Borders.com will at minimum be break-even this year and will be accretive in 2009.

“We are thrilled to have launched our new Borders.com site today as it will be extremely meaningful to our business,” Jones said.  “The site has several innovative features that we believe shoppers will find compelling, and importantly, we will be able to market it to our over 26 million Borders Rewards loyalty program members who will now be able to earn and use program benefits online as well as in our stores.  During the next couple of months, we will roll out the new Borders.com to our superstores nationwide via existing computer kiosks operating in all of our locations. This will help us strengthen our ability to meet customer needs with vastly expanded selection and should help capture sales that may have been lost in the past to other internet competitors.”

Consolidated Results

Borders Group achieved first quarter consolidated sales of $784.7 million, a decrease of 1.0% over 2007. The first quarter loss from continuing operations was $31.7 million or $0.53 per share compared to $29.1 million or $0.50 per share a year ago.

Consolidated gross margin from continuing operations as a percent of sales decreased by 0.3% from 23.3% to 23.0% in the first quarter as the negative impact of de-leveraging occupancy costs more than offset the gross margin benefit of a favorable sales mix.  As a percent of sales, SG&A from continuing operations increased by 0.8% from 28.1% to 28.9% in the first quarter due to non-operating items and expense de-leveraging.

Capital expenditures were reduced by $4.5 million in the first quarter to $29.6 million from $34.1 million for the same period in 2007.  Management has critically reviewed capital expenditure plans for 2008 and expects to spend between $80 million to $85 million for the year compared to $142.7 million in 2007. Debt was reduced by $130.9 million to $591.9 million at the end of the first quarter from $722.8 million, including discontinued operations at the end of the first quarter a year ago. The company improved inventory turn for the fourth consecutive quarter compared to the prior year. In the first quarter, inventory was reduced by 13.2%—or $188.4 million at cost—compared to a year ago.

Domestic Borders Superstores

Total first quarter sales at domestic Borders superstores were $600.7 million, a decrease of 2.3% over the same period in 2007.  Same-store sales in the segment decreased by 4.1%. The book category was relatively stable considering the overall consumer environment, declining by just 1.2% on a same-store sales basis.  Categories that performed well with strong same-store sales results include Bargain books, Children’s, Seattle’s Best Coffee cafes and Gifts and Stationery, driven by Paperchase. Music declined by 25.8% as negative sales trends continued and the company implemented a planned reduction in inventory and floor space devoted to the category.  Factoring out music, comparable store sales at domestic Borders superstores decreased by 1.7%. Borders superstores reported an operating loss of $30.0 million in the first quarter compared to an operating loss of $22.0 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. 

The company opened five new Borders superstores in the U.S. during the period—all of them new concept stores—and ended the first quarter with a total of 514 domestic superstore locations.

Waldenbooks Specialty Retail

Comparable store sales decreased within the Waldenbooks Specialty Retail segment by 0.8% for the period. Total sales were down by 11.2% in the first quarter to $96.0 million, as the number of stores was reduced from 553 at the close of the first quarter 2007 to 476 at the end of the quarter this year.

The first quarter operating loss for the Waldenbooks Specialty Retail segment was $13.6 million compared to $14.0 million in 2007 with the improvement primarily due to increased gross margins.

International

For the first quarter, total sales from continuing operations in the International segment were $88.0 million, which is up by 27.2% compared to the same period a year ago.  Excluding the impact of foreign currency translation, total International sales from continuing operations increased by 17.3% in the first quarter. The company opened one new International Borders store in the first quarter.

Comparable store sales in the International segment increased by 3.1% in the first quarter as a result of strong performance in Australia stores. The first quarter operating loss for the International segment was $1.3 million compared to a first-quarter operating loss of $1.0 million in 2007. Management indicated that the strategic alternatives process for its Australia/New Zealand/Singapore and Paperchase businesses is ongoing.

Borders Group plans to issue second quarter financial results August 26, 2008 after market close with a conference call for investors to follow at 8 a.m. August 27, 2008.

About Borders Group

Headquartered in Ann Arbor, Mich., Borders Group, Inc. is a leading global retailer of books, music and movies with more than 1,100 stores and approximately 30,000 employees worldwide.  More information on the company is available at www.bordersgroupinc.com.