- The Washington Times - Thursday, March 22, 2007

NEW YORK — A sluggish book market and intense competition are forcing the nation’s top two booksellers — Barnes & Noble Inc. and Borders Group Inc. — to rewrite the rules on the book business.

Both merchants reported disappointing fourth-quarter results yesterday.

Borders, which reported a loss in the quarter, announced a dramatic shake-up of its business. It plans to cut the number of its Waldenbooks stores in half, to about 300 by the end of next year, and is considering the sale of most of its international businesses.

The Ann Arbor, Mich., company said it aims to focus more of its efforts on its domestic Borders superstore business and better tailor those stores to local markets.

It will develop a consolidated Borders.com Web site, end a six-year partnership with Amazon.com, and pursue plans to publish exclusive books by celebrities, first-time authors and others under the Borders name.

“We need to reinvent our business to exploit the rapid changes taking place in how consumers access information and entertainment,” Borders Group Chief Executive George Jones said.

Borders is working on a concept-store prototype that will be refined this year and is expected to be introduced early next year.

Barnes & Noble, which eked out a small profit increase in the fourth quarter, has focused on further sweetening deals to its best customers. It already operates an electronic-commerce site and has developed a publishing business through its acquisition of Sterling Publishing.

In a conference call with investors yesterday, Barnes & Noble’s chief executive officer, Steve Riggio, emphasized that it needed to offer customers better deals — even if it hurts profits in the short term — saying industry growth is slowing while competition is intensifying.

“We’re just trying to increase what we have by making it easier for people to shop both online and in the stores. And you know, giving them a better deal,” he said.

Competition from discounters such as Costco and Wal-Mart, which can afford to slash prices on books, has squeezed profits at Barnes & Noble and Borders, which have responded with their own discounts.

Rumors have risen about private equity buyouts of the nation’s top booksellers. A report from Goldman Sachs analyst Matthew Fassler issued Wednesday revealed that it would make sense for Barnes & Noble, the larger operator, to buy Borders, though it would face “significant regulatory hurdles.”

Barnes & Noble executives declined to comment during the conference call on the issue. Anne Roman, a spokeswoman for Borders, also declined to comment.

Barnes & Noble reported a fourth-quarter profit of nearly $127 million ($1.84 per share) versus a profit of $123 million ($1.76) in the year-ago period. It also forecast a loss in the first quarter.

Analysts surveyed by Thomson Financial expected fourth-quarter earnings per share of $1.88.

On March 5, Barnes & Noble warned that profits for the current year would be below analysts’s expectations, attributing its muted outlook in part to the company’s move to reward its best customers by cutting prices. Although J.K. Rowling’s “Harry Potter & the Deathly Hallows,” which will go on sale July 21, will produce a large sales spike in the second quarter, it will be sold at a deep discount, a move that will reduce profit margins.

Borders reported a fourth-quarter loss of $73.6 million ($1.25) for the three months ended Feb. 3 compared with a profit of $119.1 million ($1.78 diluted) a year ago.

Borders uses basic per-share results when it records a loss and diluted per-share results when it reports a profit.

The quarter’s results included $2.86 per share in charges related to good will, store closure costs and accelerated depreciation costs related to store remodeling.

Excluding the charges, earnings totaled $1.61 per share versus $1.87 per share a year ago.

Analysts polled by Thomson Financial were looking for a profit of $1.63 per share.

Barnes & Noble’s shares slipped $1.10, or 2.82 percent, to close at $37.90 on the New York Stock Exchange. Borders’ shares dropped 73 cents, or 3.41 percent, to $20.70 per share.

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