Borders Shows Good Progress...But Industry Challenges Might be Too Much

5/28 - "This quarter, while the bottom line may be not there yet, we saw evidence of the change delivered by Mr. Jones. He has un-tethered himself from Amazon's grasp in the online arena at surprisingly little costs, he is focused on reducing working capital and expenses, and developing a new concept to compete with Barnes & Noble and online entities.

Unfortunately for Mr. Jones, whether the holes on this ship are too big to be repaired is still a question mark. Unlike Home Depot, which we believe is in a cyclical decline, one can argue that booksellers are in a secular decline. On-line bookselling continues to gain share and the Kindle threatens to unleash a technology change that rivals the iPod in terms of destruction that it can do to one segment. For that concern, we retain our Neutral rating, but if we are wrong on the macro, then we view no one better than Mr. Jones to lead the repair charge.

One other positive note from the earnings: we have seen other retail mergers happen where the larger player realized that its prey will never go away. To the extent that Borders’ strong capital management leads Barnes to believe that waiting for a Chapter 11 filing is a mistake, then perhaps a deal can be worked out between the two."