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Borders Gets Cash Infusion, May Seek Sale

20 Mar, 2008 By: Erik Gruenwedel

Citing a tough retail and credit climate, Borders Group received a $125 million financing commitment from its largest shareholder as it considered multiple strategic options, including sale of the company.

The news sent shares of the Ann Arbor, Mich.-based parent of Borders Superstores and Walden Books freefalling nearly 30% to $5 per share in after-hours trading March 20.

Borders said it retained J.P. Morgan Securities and Merrill Lynch & Co. to assist with future moves. It also suspended its dividend program.

In a call with investors, CEO George Jones said the cash infusion, which included an initial $42.5 million and offer to acquire select foreign operations, would likely fund operations through 2008.

Jones said Borders would not give fiscal 2009 guidance.

CFO Edward Wilhelm said sales in the fourth quarter looked promising until December, when he said revenue throughout the retail environment acted like a faucet that “sort of cut off.”

He said the ongoing “very difficult” consumer environment had presented few options to expand the company's credit line going forward, thus necessitating the financing deal.

“The capital markets are in disarray,” Wilhelm said.

The executives said the funding was not needed to continue product shipments from vendors.

Despite the turmoil, Borders reported same-store (open at least 12 months) sales growth of 2.1%, fueled largely by a 3.2% comp increase in book sales for the quarter that ended Feb. 2, 2008.

At the same time, margins fell from 32.2% to 31.3%.

Music sales continued to decline, with a 14.2% drop in same-store comps. As a result, Borders said it would drastically scale back music CD selections on store shelves.

Executives said the chain would attempt to curb DVD shrink and fiscal waste at its in-store caf?s.

Jones said DVD sales decreased $20 million in fiscal 2007 and resulted in changes in how Borders secured packaged media.

“The magnitude of this DVD shrink, it is not an insignificant issue,” he said.

The company posted fourth-quarter profit of $64.7 million on revenue of $1.3 billion, compared to a loss of $73.6 million on nearly identical revenue during the same period last year.

For fiscal 2007, Borders lost $157.4 million in the fiscal year on revenue of $3.8 billion, compared to a loss of $151.3 million and revenue of $3.7 billion in 2006.

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