More on Borders's third quarter results, from the company's conference call with analysts, courtesy of Seeking Alpha:
Before the economy headed downhill--CEO George Jones called the current retail climate "by far the most difficult I've ever seen during my 36-year retail career"--Borders had anticipated "much stronger earnings." But then the company responded quickly, Jones said: "We got in front of this storm . . . early this year we revised our planned sales to very conservative levels and took the necessary steps to reduce inventory and expenses. So even though customer traffic has declined during this period [and] sales have been tough, we have still managed our business well and the result is that we have still been able to make major progress on improving our balance sheet." He noted that Borders "actually turned out to be one of the very few retailers that did not report significantly decreased operating earnings for the quarter."
Categories that did well in the fall included children's, benefitting from the Stephenie Meyer Twilight series, as well as Paperchase gifts and stationery. The company took what Jones called "an industry-leading position in our stores with dedicated tables featuring the Twilight Saga books as well as a tremendous assortment of other items related to the film [Twilight, which was released 10 days ago], some of those which are exclusive to Borders that are popular with tweens and teens."
After a reduction of about a third, music, whose sales have dropped steadily for years, now occupies only 7% of total floor space at Borders. The areas formerly dedicated to music now feature "growth categories" like children's and bargain books.
Borders expects strong-selling titles this season to include Malcolm Gladwell's Outliers, James Patterson's Cross Country and Ina Garten's Barefoot Contessa Back to Basics.
Borders was able to reduce inventory 19.5% in part, Jones said, because it collaborated "more closely with vendors on opportunities such as product flow, accelerated returns, assortment management and other efforts, some of which are standard practice in many industries that have been long overdue in the bookselling business." He predicted that these efforts will make Borders "the better run and more profitable company."
At the same time, Jones said that the "aggressive and multifacted" inventory tightening had "at least some degree of negative impact on our sales." Borders is now "fine-tuning" by "doing a store-by-store deep dive into our inventory, returning what is not selling and adding back in where we may have cut too deeply at specific store locations." The average superstore has more than 100,000 titles.
The company also made a major effort to reduce shrinkage and is beginning a program with the help of a consultant to improve gross margin.
Borders.com's sales of $11.9 million in the third quarter were "lower than expected" and caused by "overall economic conditions" as well as a delay in launching. The company doesn't expect to break even in online sales this year. The company has just finished opening borders.com in kiosks in each Borders store.
Commenting on Borders.com, Jones added that "frankly it seems like we had one sort of technical snafu after another and just a lot of odd things" that were only recently brought under control. As a result, Borders had been "reluctant" to market its online sales unit fully.
CFO Ed Wilhelm said that Borders is "leveraging our distribution network to a greater degree and creating a more just-in-time inventory model." Borders.com will help in making special orders easier to do in-store.
The Borders Rewards loyalty program has nearly 30 million members.