Borders Books Financial Trouble

http://www.futureofcapitalism.com/2010/12/borders-books-financial-trouble

As an author, I'm hoping Borders Books will survive in one form or another. But as a consumer of news, I see the company's latest troubles — it's delaying payments to publishers and its shares are trading for a little more than $1 apiece — as a great opportunity to look back at some of the earlier coverage.

Here's the New York Times, in a November 21, 1999 article by Michelle Leder that ran under the headline "Investing: Old-Fashioned Growth Stirs Interest in Borders":

WITH all the attention being paid to the online rivalry between Barnes & Noble and Amazon.com, could the smartest buy actually be the shares of the beleaguered Borders Group?

That is what investors in Borders are hoping....

Even before the appointment of Mr. Josefowicz, however, the strong market position and cash flow of Borders had begun to attract value investors. The company operates 284 Borders Books and Music superstores, nearly 900 Waldenbooks mall stores and about 40 bookstores overseas. It had $2.60 billion in sales last year, not far behind Barnes & Noble, at $3.01 billion, and far ahead of Amazon, at $610.0 million. Driving Borders's growth are its superstores and international outlets.

Despite the jump last week, Borders shares are still down more than 42 percent since Dec. 31; they are now at $14.375. The stock is trading at just 10.5 times analysts' estimated earnings of $1.37 a share for the year ending January 2001.

Barnes & Noble, by contrast, is trading at over 15 times next year's earnings estimates. Amazon is expected to post a loss for its 2001 fiscal year.

"At these prices, I'm buying," said Alan Snyder of Snyder Capital Management of San Francisco, who since June has nearly doubled his stake in Borders, to 3.6 million shares -- about 4.6 percent of the company's outstanding stock. Other big buyers include Lazard Freres, which quadrupled its stake this year, to 3.43 million shares as of Sept. 30.

And the largest shareholder, Dreman Value Management, which owns more than 10 percent of the outstanding shares, has been adding to its position. David Dreman, chief investment officer, said he is looking for the stock to rise by at least 50 percent over the next 12 months or so as Borders implements a new Internet strategy and resolves its management turmoil. "Borders is an excellent bookseller that got slammed because it was late to the Internet," Mr. Dreman said.

Many investors are optimistic about the company's use of the "clicks and mortar" strategy, in which walk-in customers use a Borders intranet site to search for titles and order books once they are in the store. Borders partisans say this combination of traditional and online retailing may help the company sidestep online price wars.

Here's a CNNMoney article from July 11, 2000, headlined, "Stock Picks by the Pros," quoting the same Alan Snyder on which the Times relied. Mr. Snyder appeared on CNNfn to tout his pick:

One of his picks is Borders Group. "It's is our anti-Internet play. It's been beaten down over the last year and a half because of fears that Amazon is going to dominate the business. In fact Borders every single quarter since Amazon got started has been showing higher and higher same-store sales gains and they continue to open new superstores around the country very successfully," he said. "Their earnings are growing, the stock is selling at only about nine times earnings and growing at a very nice rate whereas Amazon has never earned a profit and is still not going to earn a profit for quite a while into the future."

Here's a Fortune Magazine interview by Lawrence Armour from March 1997 with Robert Elliott, vice chairman of the Bessemer Trust money management firm. The article began, "If you aren't a member of the ruling class but would like to invest like one, read on":

What's happening back home in small- and mid-cap areas?...

Borders Group, the country's second-largest book retailer, is working to position itself as a quality media retailer offering the broadest merchandise assortment in a given marketplace. Our other consumer favorite is Viking Office Products...

One of the risks of value investing is that beaten-down stocks are beaten-down for a reason — the old "value trap." Now it may yet be that some genius will find a way to turn Borders around. At the current price, there's not much to lose. The investors quoted in these article get some right as well as wrong, and it's possible they got out of their Borders positions before the shares lost most of their value. And you can't blame the press entirely for passing along the stock tips of successful investors. Still, the whole situation is an example of why newspaper or magazine articles that begin with language like "If you aren't a member of the ruling class but would like to invest like one, read on" or "WITH all the attention being paid to the online rivalry between Barnes & Noble and Amazon.com, could the smartest buy actually be the shares of the beleaguered Borders Group?" should be taken by readers with a giant rock of salt. If it were a financial company rather than a news organization making these kinds of recommendations with these kinds of outcomes and with so few caveats, the editorial writers at these same news organizations would probably be clamoring for Elizabeth Warren to intervene to protect the vulnerable consumers.

by Ira Stoll  |  Dec 31, 2010 at 10:10 am Related Topics:  Press receive the latest by email: subscribe to the free futureofcapitalism.com mailing list