Borders Results: Bland and Good

5/27 - "Borders hopes that taking its site in house will compensate for its sputtering bricks-and-mortar store business. Unfortunately, and more likely, Borders will now be able to fail at two businesses instead of one."

"Will Borders.com succeed? Almost certainly not. To succeed in a commodity ecommerce business like books, you need scale, and as the chart below shows, Borders has none.

So what should this proud possessor of not one but two crappy businesses do? Sell the company immediately."

5/29 - "BGP’s 1Q2008 results and call suggest strategic moves in the right direction, including a broad focus on profitability over revenue growth, a substantial cost-cutting effort, and impressive inventory reductions. We see little evidence of these efforts in recent financial results, and are cutting our estimates, 2008 to a loss of ($0.14) from EPS of ($0.10), 2009 to $0.30 from $0.45, and 2010 to $0.52 from $0.82. We are trimming our price target to $6.25 from $6.50, as the impact of estimate cuts has blunted valuation adjustments associated with the firm’s increasingly returns-oriented approach, and by the strategic exploration process reported on by the financial press in recent weeks."

"We expect the stock to mark time near current levels, with significant volatility given enormous operating leverage...Signs of a more rational approach should benefit BKS (Barnes & Noble). We do not see a strategic deal between BKS & BGP as likely, despite potential synergies, given BGP’s significant lease liabilities."

5/28 - "This quarter, while the bottom line may be not there yet, we saw evidence of the change delivered by Mr. Jones. He has un-tethered himself from Amazon's grasp in the online arena at surprisingly little costs, he is focused on reducing working capital and expenses, and developing a new concept to compete with Barnes & Noble and online entities.

Unfortunately for Mr. Jones, whether the holes on this ship are too big to be repaired is still a question mark. Unlike Home Depot, which we believe is in a cyclical decline, one can argue that booksellers are in a secular decline. On-line bookselling continues to gain share and the Kindle threatens to unleash a technology change that rivals the iPod in terms of destruction that it can do to one segment. For that concern, we retain our Neutral rating, but if we are wrong on the macro, then we view no one better than Mr. Jones to lead the repair charge.

One other positive note from the earnings: we have seen other retail mergers happen where the larger player realized that its prey will never go away. To the extent that Borders’ strong capital management leads Barnes to believe that waiting for a Chapter 11 filing is a mistake, then perhaps a deal can be worked out between the two."