| BORDERS GROUP INC Item 1A Risk Factors Risk Factors The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones the Company faces |
| Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial also may impair the Company’s business operations |
| If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected |
| Expansion Strategy The Company’s growth strategy is dependent principally on its ability to open new superstores and operate them profitably |
| The Company has been engaged in an aggressive expansion and remodel program, pursuant to which it has opened 15 domestic superstores and completed major remodels of 100 existing domestic superstores in 2005 |
| In 2006, the Company expects to open approximately 35 domestic superstores and complete major remodels of up to 100 existing domestic superstores |
| Beginning in 2005, new stores opened and the majority of remodeled stores will feature cafes offering Seattle’s Best Coffee and gifts and stationery by Paperchase |
| The Company also opened 13 International superstores in 2005, and expects to open approximately 12 to 14 International superstores in 2006, primarily in the United Kingdom and Australia |
| In general, the rate of the Company’s expansion depends, among other things, on general economic and business conditions affecting consumer confidence and spending, the availability of qualified management personnel and the Company’s ability to manage the operational aspects of its growth |
| It also depends upon the availability of adequate capital, which in turn depends in a large part upon cash flow generated by Borders and Waldenbooks Specialty Retail, as well as the continued ability of the Company to locate and develop suitable sites for its superstore expansion and kiosk programs |
| The Company’s expansion into international markets has additional risks |
| It is costly to establish international facilities and operations, and to promote the Company’s brands internationally |
| Sales from the Company’s International segment may not offset the expense of establishing and maintaining the related operations and, therefore, these operations may not be profitable on a sustained basis |
| The Company is also subject to a number of risks inherent in selling abroad, including, but not limited to, risks with respect to foreign exchange rate fluctuations, local economic and political conditions, restrictive governmental policies and laws (such as trade protection measures, limitations on the repatriation of funds, nationalization and consumer protection laws and restrictions on pricing or discounts), difficulty in developing and simultaneously managing a larger number of unique foreign operations as a result of distance, language and cultural differences, tax and other laws and policies of the US and other 9 _________________________________________________________________ [61]Table of Contents jurisdictions and geopolitical events, including war and terrorism |
| In addition, local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand name recognition |
| Also, the Company may not be able to hire, train, retain, motivate and manage required personnel, which may limit the Company’s growth internationally |
| The Company’s future results will depend, among other things, on its success in implementing its expansion strategy |
| If stores are opened more slowly than expected, sales at new stores reach targeted levels more slowly than expected (or fail to reach targeted levels) or related overhead costs increase in excess of expected levels, the Company’s ability to successfully implement its expansion strategy would be adversely affected |
| In addition, the Company expects to open new superstores in certain markets in which it is already operating superstores, which could adversely affect sales at those existing stores |
| There can be no assurance that the Company will sustain its accelerated rate of superstore growth or that it will achieve and sustain acceptable levels of profitability, particularly as other leading national and regional book, music and movie store chains develop and open superstores |
| Waldenbooks Waldenbooks’ results are highly dependent upon conditions in the mall retailing industry, including overall mall traffic |
| Mall traffic has been sluggish over the past several years and the Company expects it to remain so for the foreseeable future |
| In addition, increased competition from superstores has adversely affected Waldenbooks’ sales and comparable store sales |
| There can be no assurance that mall traffic will not decline further or that superstore competition, or other factors, will not further adversely affect Waldenbooks’ sales |
| Seasonality The Company’s business is highly seasonal, with sales generally highest in the fourth quarter |
| In 2005, 36dtta1prca of the Company’s sales and substantially all of the Company’s operating income were generated in the fourth quarter |
| The Company’s results of operations depend significantly upon the holiday selling season in the fourth quarter; less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses which may be incurred in the first three quarters of the year |
| Other factors that could affect the holiday selling season include general economic and geopolitical conditions, overall consumer spending patterns, weather conditions and, with respect to the Company’s mall business, overall mall traffic |
| The Company’s expansion program generally is weighted with store openings in the second half of the fiscal year |
| In the future, changes in the number and timing of store openings, or other factors, may result in different seasonality trends |
| Competition The retail book business is highly competitive |
| Competition within the retail book industry is fragmented, with Borders facing direct competition from other national superstore operators, as well as regional chains and superstores |
| In addition, Borders and Waldenbooks compete with each other, as well as other specialty retail stores that offer books in a particular area of specialty, independent single store operators, discount stores, drug stores, warehouse clubs, mail order clubs and mass merchandisers |
| In the future, Borders and Waldenbooks may face additional competition from other categories of retailers entering the retail book market |
| The music and movie businesses are also highly competitive and Borders faces competition from large established music chains, established movie chains, as well as specialty retail stores, movie rental stores, discount stores, warehouse clubs and mass merchandisers |
| In addition, consumers receive television and mail order offers and have access to mail order clubs |
| The largest mail order clubs are affiliated with major manufacturers of pre-recorded music and may have advantageous marketing relationships with their affiliates |
| 10 _________________________________________________________________ [62]Table of Contents The Internet is a significant channel for retailing in all media categories that the Company carries |
| In particular, the retailing of books, music and movies over the Internet is highly competitive |
| In addition, the Company faces competition from companies engaged in the business of selling books, music and movies via electronic means, including the downloading of books, music and movie content |
| Consumer Spending Patterns Sales of books, music and movies have historically been dependent upon discretionary consumer spending, which may be affected by general economic conditions, consumer confidence and other factors beyond the control of the Company |
| In addition, sales are dependent in part on the strength of new release products which are controlled by vendors |
| A decline in consumer spending on books, music and movies, or in bestseller book, music and movie buying could have a material adverse effect on the Company’s financial condition and results of operations and its ability to fund its expansion strategy |
| Foreign Exchange Risk The results of operations of the International segment are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into US dollars upon consolidation |
| As exchange rates vary, sales and other operating results, when translated, may differ materially from expectations |
| In addition, the Company is subject to gains and losses on foreign currency transactions, which could vary based on fluctuations in exchange rates and the timing of the transactions and their settlement |
| Potential for Uninsured Losses and/or Claims The Company is subject to the possibility of uninsured losses from risks such as terrorism, earthquakes, hurricanes or floods, for which no, or limited, insurance coverage is maintained |
| The Company also is subject to risk of losses which may arise from adverse litigation results or other claims |
| Changes to Information Technology Systems May Disrupt the Supply Chain The Company’s success depends, in large part, on its ability to source and distribute merchandise efficiently |
| The Company continues to evaluate and is currently implementing modifications and upgrades to its information technology systems supporting the supply chain, including merchandise planning and forecasting, inventory, warehouse and price management |
| Modifications involve replacing legacy systems with successor systems or making changes to legacy systems |
| The Company is aware of the inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions, and believes it is taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies |
| The Company anticipates that the launch of these successor systems will continue to take place in a phased approach over an approximate three to four year period that began in 2005 |
| There can be no assurances that the Company will successfully launch these new systems as planned or that they will occur without supply chain or other disruptions or without impacts on inventory valuation |
| These disruptions or impacts, if not anticipated and appropriately mitigated, could have a material adverse effect on the Company’s financial condition and results of operations |
| Distribution and Logistics Network The Company has undertaken a multi-year initiative to enhance the efficiency of its distribution and logistics network |
| A component of this strategy is the relocation of the Company’s Harrisburg, Pennsylvania distribution facility to a new, 600cmam000 square foot, state-of-the-art facility near Carlisle, Pennsylvania beginning in the first quarter of 2006 |
| In addition, some of the operations of the Company’s Indiana facility, and those of a facility in Tennessee, will be transferred to other facilities in 2006 |
| There can be no assurances that the Company will successfully open the new facility in Carlisle, Pennsylvania on 11 _________________________________________________________________ [63]Table of Contents time, or that the Company will successfully transfer the operations of the Indiana facility and the Tennessee facility to the new facility |
| These activities, if not successfully executed, could have a material adverse effect on the Company’s financial condition and results of operations |
| Planned Retirement of Mr |
| Josefowicz, President, Chairman and Chief Executive Officer of the Company, has advised the Company’s Board of Directors that he will retire no later than the end of fiscal 2007 |
| Josefowicz will remain in his current role until the Board names a successor, and will assist the Board as needed through the end of fiscal 2007 to assure an orderly transition |
| Management believes that the Company’s continued success will depend to a significant extent upon the efforts and abilities of the key officers of the Company and each of its subsidiaries |
| A failure to hire a suitable replacement for Mr |
| Josefowicz or the loss of the services of any of the Company’s key officers could have a material adverse effect on the Company |
| The Company does not maintain “key man” life insurance on any of its key officers |
| Other Risks The Company is also subject to numerous other risks and uncertainties which could adversely affect the Company’s business, financial condition, operating results and cash flows |
| These risks include, but are not limited to, higher than anticipated interest, occupancy, labor, merchandise, distribution and inventory shrinkage costs, unanticipated work stoppages, energy disruptions or shortages or higher than anticipated energy costs, asset impairments relating to underperforming stores or other unusual items, higher than anticipated costs associated with the closing of underperforming stores, the continued availability of adequate capital to fund the Company’s operations, the stability and capacity of the Company’s information systems, unanticipated costs or problems relating to the informational technology systems required for the operations of the Company, and changes in accounting rules |