BGP Stock Selling Report: We're also selling Borders Group (NYSE: BGP). Our list of dislikes with this company is very long.
We worry that the company doesn't realize that the online booksellers are taking Borders' prime demographic customers. As Alex Schay noted earlier this year, the 80-20 rule applies to this business as well as so many others. That is, 80% of your sales come from 20% of your customers. We think Amazon.com and barnesandnoble.com have made incursions into Borders' precious 20% customer base and that Borders is not responding appropriately.
Overall, we've never liked the economics of this business (Dale more so than Alex, especially as it pertains to the potential economics of the business), given the slow cash conversion cycle and the capital investment needs to expand Borders. Management at Borders has focused way too much in the past on Amazon.com's valuation, but the fact is that Amazon.com yielded free cash flow of $29 million in their most recent quarter, compared to free cash flow at Borders of $33.4 million last year. That's on sales of $252 million for Amazon.com versus sales of $2.27 billion for Borders. Sure, there's seasonality in the book business, but it's highly likely Amazon.com will expand sales sequentially next quarter.
If we have zero confidence in management (Alex thinks they're smarter than I do), we're not going to feel comfortable with this investment. And we're well aware that this can go higher at some point, making us look wrong about this decision. Speaking personally, I derive no pleasure in being an owner of this company. And that's not our idea of a productive relationship between a company and its shareholders. Finally, the company should worry about its own share price instead of disparaging Amazon.com at trade shows, as the company's former CEO did. We understand that the new CEO has the right priorities in mind, though.
As we said the other day, the market's not that dumb. It's discounting a number of problems that may or may not be real. We do happen to be selling at a price of near maximum pessimism. But I feel, more strongly than Alex, that the new competitive landscape may be doing substantial damage to Border's market position. Same-store comps that are so flat in a year of buoyant consumer spending is a bad sign and we believe, again, that the best demographics might be slipping away. Maybe if the company could provide comps for markets where snowfall was not a factor we could make a better assessment.
If there were no better opportunities around, we could wait for this company to turn around a badly listing shareholder value creation vessel. But this thing's burning above the waterline. There are better opportunities available and I personally don't want to find out the harrying end to this story where the ship sinks and all the passengers drown. With one lifeboat left, we're out of here and we're not coming back for any other screaming survivors in the water.
-- Dale Wettlaufer (TMF Ralegh)
fool.com |
