Borders Group, Inc. BGP
Borders' high-quality Superstores franchise is obscured by money-losing Mall and International segments; rationalizing those while remodeling stores and buying back stock unlocks $36 vs. $21 today.
Thesis
Borders (BGP) trades at $21 because the market lumps a high-quality Superstores segment with two money-losing businesses — Waldenbooks mall stores and underperforming International operations. Pershing argues Superstores are a misunderstood franchise with stable 9.6-10.3% EBITDA margins, ~29% unit ROI and ~6% annual unit growth, whose earnings are temporarily masked by declining Music sales, a new Rewards-program accrual, and one-time distribution-center and remodel costs. Mall Stores (70% of leases expiring in 2006) and International are 'worth more dead than alive,' with ~$200mm of combined trapped net working capital that can be freed with minimal disruption as leases roll. Combined with a ~30% share-count reduction since 2004 and new CEO George Jones focused on returns, a sum-of-parts valuation at 7x 2008E EBITDA yields $36/share within 18 months — a 72% premium with no multiple expansion assumed.
SCQA
Borders is the #2 U.S. book retailer with 13% market share, $4.1bn of 2006E revenue and $235mm of EBITDA, trading at $21 (6.9x EV/EBITDA) after falling from $27.47 in early 2005 on weakening margins and same-store-sales.
Consolidated margins mask the truth: profitable Superstores are bundled with money-losing Mall Stores (EBITDA margins collapsed from 7.5% to 3% since 2003) and deteriorating International, while Music decline, Rewards accruals, and one-time remodel costs further obscure Superstore earnings power.
Rationalize Mall Stores as 70% of leases expire in 2006, sell or fix International, complete Superstore remodels replacing Music with higher-margin Paperchase and Seattle's Best Coffee, and keep repurchasing shares under new CEO George Jones.
Sum-of-parts at 7x 2008E Superstores EBITDA plus trapped NWC in Mall and International yields $36/share — a 72% premium to today's $21 within 18 months, assuming no multiple expansion.
The three reasons
- 1
Superstores are a misunderstood franchise with stable ~10% EBITDA margins and ~29% unit ROI
- 2
Mall Stores and International hold ~$200mm of trapped NWC — 'worth more dead than alive'
- 3
~30% share-count reduction since 2004 plus new CEO George Jones compound value creation
Primary demands
- Close unprofitable Waldenbooks Mall Stores as leases expire and free ~$90mm of trapped NWC
- Sell or rationalize the International segment to unlock ~$110mm of trapped NWC
- Continue Superstore remodel program to reduce Music exposure and grow Paperchase and Seattle's Best Coffee
- Continue the aggressive share repurchase program
- Let new CEO George Jones drive operational focus on returns
KPIs cited
Pattern membership
Precedents cited
- Linens 'n Things LBO (7.7x EV/EBITDA, 6.2x total leverage)
- Burlington Coat Factory LBO (7.4x / 6.5x)
- The Sports Authority LBO (7.7x / 6.8x)
- Michael's Stores LBO (11.0x / 7.8x)
Composition what's on the 53 slides
Slide gallery ·
Notes
Classic Pershing 'misunderstood high-quality hidden inside a conglomerate' thesis delivered as a long investment case — no villain, constructive toward new CEO George Jones. Title 'Don't Judge a Book By Its Cover' is a strong thematic hook tied to the company. Explicit SCQA structure: starts with 'Traditional Sentiment on Borders' (unattractive industry, 2nd-place operator, limited FCF) then rebuts each point. 'Mini Mall with tenants' reframing (Books / Café / Paperchase / Music / DVD) on p.21 is a memorable mental model. Clean sum-of-parts reveal on p.46. 'Worth more dead than alive' used twice (Mall Stores, International). Cover names only the firm; authorship attributed to William Ackman (presented at Value Investing Congress 2006). Outcome: thesis ultimately did not play out — Borders filed Chapter 11 in Feb 2011 and liquidated.