UPDATE: Borders 2Q Loss Widens; Sales, Margins Keep Slumping

Borders Group Inc.'s (BGP) continued to struggle as its fiscal second-quarter loss widened and customer traffic and sales continued their sharp decline while margins kept falling.

The sales slide has weighed mightily on the No. 2 U.S. bookstore operator by sales. Management has changed, thanks to an investment from financier Bennett LeBow that has helped prop Borders up amid declining consumer spending in the recession. In July, it agreed to sell its Paperchase stationary and gifts business for $31 million to pare its heavy debt load, though its debt net of cash actually was 2.7% higher versus the year-ago period at $262.1 million.

Online sales at Borders.com were a bright spot, jumping more than 56% over last year, but at just $15.5 million for the quarter, are a long way from fixing Borders large and more immediate problems.

An expanded rewards program for customers, that now offers deeper discounts and free online shipping to customers for a $20 annual fee, went into effect Wednesday, along with a $20 price reduction on two electronic-book readers it sells. Borders hopes this, along with better customer service and expanded non-book offerings in its stores, like craft kits from Build-A-Bear Workshop Inc. (BBW), can drive the top-line turnaround it desperately craves.

For the quarter ended July 31, Borders' loss from continuing operations was $51.6 million, or 74 cents a share, compared with a year-earlier loss of $45.1 million, or 75 cents a share. Shares outstanding rose 15%, thanks to the purchase during the quarter by Vector Group Ltd.'s (VGR) chairman and tobacco magnate LeBow, of 11.1 million shares for $25 million. The reclusive LeBow is now chairman and chief executive of Borders Group, with President Mike Edwards running the day-to-day operations of the stores.

Revenue fell 11.9% to $530.4 million, following last year's 18% drop, as same-store sales slid 6.8%, and gross margin slumped to 19.3% from around 23% amid higher promotional discounts. Same-store sales at the No. 1 bookstore chain, Barnes & Noble Inc. (BKS), which is also struggling amid a proxy fight and an potential sale of the company, unexpectedly fell during its most recent quarter, but by a much smaller degree.

Borders, a late entrant to the e-book market, has cut prices on its Kobo and Aluratek Libre readers by about $20, making the Aluratek less than $100 in an effort to attract customers. In a Tuesday interview, Edwards said Borders knows it can't meet its goal of a 17% share of the e-book market by next summer if it doesn't sell more readers.

Borders stock was down 2 cents, or 1.9%, at $1.06 apiece in early Tuesday trading, and is off almost 66% in the past year. The low price damps hopes that LeBow will soon exercise about 35.1 million warrants to acquire the stock at $2.25 that he received in conjunction with his initial investment. The warrants would ultimately provide Borders a much needed, roughly $79 million infusion, and give LeBow around a 35% equity stake.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

(Matt Jarzemsky contributed to this article)

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