OnTheBlock: Borders, Consolidated Wrestle With Merchandising Shifts

Two large retailers – bookseller Borders Group Inc. and closeout merchant Consolidated Stores Corp. – have launched strategic reviews triggered by their depressed stock prices. Both have mall-based soft spots – the Waldenbooks chain at Borders and the K*B Toys unit at Consolidated. Merrill Lynch got the assignment to help Borders explore strategic alternatives. Consolidated retained Credit Suisse First Boston to assist in pursuing what the company called “strategic repositioning alternatives.” Borders, the second-largest operator of book and recorded music superstores, said its alternatives include a recapitalization, a leveraged buyout, or a merger. Ann Binkley, a Borders spokeswoman, would not elaborate on statements in the firm’s press release except to comment that the review was stimulated by a desire to raise shareholder value. But the news led to widespread rumors that Borders really was contemplating an LBO. Consolidated, which runs toys and closeout merchandise chains such as Odd Lots, Mac Frugal’s Bargains*Close-Outs, and Pic N’ Save, in addition to K*B, said its options included a recapitalization, mergers, divestitures, and stock repurchases. Southfield, Mich.-based Borders earned $110.9 million, or $1.38 a share, in 1999, up from $102.6 million, or $1.24 per share the year before, as sales reached nearly $3 billion from $2.6 billion. The superstores clearly drove the performance racking up gains of 20% in sales and 40% in earnings. Waldenbooks, by contrast, eked out a 4% volume gain while its earnings tumbled 15%. In announcing results, Borders tried to put the best face on them by calling Waldenbooks a “highly profitable, mature business,” whose “strategic role is to generate cash flow” for funding the growth sectors of the company. Both Borders and Consolidated, in fact, may be suffering from the same merchandising malady – the diversion of business away from malls to smaller shopping centers, freestanding large stores, and Internet sales. Consolidated did not return a phone call but David Mann, an analyst with Johnson Rice, said that the retail toy business could be expendable and is a primary depressant on the stock price. “Wall Street doesn’t like the toy business,” he said. “The specialty toy retail business is under significant pressure, not just from the Internet but also from national discounters led by Wal-Mart,” he continued. “Wal-Mart was No. 1 in selling toys last year. They used toys as a loss leader to drive traffic during Christmas. It was break-even pricing just to get people into the store.” In addition, chains like K*B also are hurting because of a “migration of shoppers to strip centers and superstores,” Mann commented. Ironically, toys, which are seasonal and subject to fads, looked like a good fit with the closeout business when Consolidated bought K*B from the old Melville Corp. at a virtual bargain price of $315 million in 1995. “But the landscape has changed a lot,” Mann said. “The story that investors are hearing about the stock is a lot more difficult.” Mann said it is also possible that the review will lead to a major stock repurchase because of Consolidated’s reduced price. Consolidated sales climbed to $4.7 billion in the fiscal year ended January 29 from $4.2 billion the year before but toy volume rose at a lower rate – to $1.8 billion from $1.6 billion. Gross profit increases in the toy business also lagged the growth in the closeout operation. The company’s net dropped to $96.1 million, or 85 cents a share, from $109.4 million, or 97 cents per share, a year earlier, including losses on the KBkids.com unit, which is to be taken public. Borders stock closed March 31 at 17-3/16 on the New York Stock Exchange, compared with a 52-week range of 11-1/16 to 17-7/8. Consolidated shares were 11-3/8 on the Big Board at the March 31 closing, compared with a 52-week range of 11-1/8 to 38-1/8.