UPDATE 3-Borders sales drop again; will rearrange stores

* Q2 loss from continuing operations 74 cents/share

* Same store sales down 6.8 pct

* Shifting away from books at stores

* Shares down 1.9 pct; Barnes & Noble up 3.8 pct (Adds details from interview, byline; updates share activity)

By Phil Wahba

NEW YORK, Sept 1 (Reuters) - Borders Group Inc BGP.N reported a quarterly loss as the second-largest U.S. book store chain cut prices and continued its years-long struggle with declining sales while the market shifts to electronic books.

Like its larger bricks-and-mortar rival, Barnes & Noble Inc (BKS.N), Borders has had to contend with fierce competition from Amazon.com Inc (AMZN.O) whose Kindle, introduced in 2007, has given it a commanding position in the growing digital books market.

But Borders has been much slower than Barnes & Noble, which introduced its Nook e-reader last year, to attack the e-books market and only launched its own e-bookstore in early July.

When it launched its e-bookstore, Borders set a target to secure 17 percent of the digital book market in one year.

Borders' sales fell 11.5 percent to $526.1 million. Sales at its superstores open at least a year, or same-store sales, fell 6.8 percent. While Barnes & Noble has also struggled, same-store sales declines at its superstores have been more moderate. In the most recent quarter, they fell 0.9 percent.

It was the first time in nearly two years that quarterly same-store sales at Borders fell by less than a double-digit percentage.

Underscoring how much ground Borders has to make up, the retailer said sales on its website had risen 56.2 percent to $15.5 million, but that represents only 3 percent of sales. At Barnes & Noble, online sales make up about one-tenth of sales.

Borders reported a net loss of $46.7 million, or 67 cents a share, for the second quarter ended July 31, compared with a loss of $45.6 million, or 76 cents a share, a year earlier.

Excluding discontinued operations, the loss was 74 cents per share, compared with a loss of 75 cents a year ago.

Borders shares were down 2 cents, or 1.9 percent, at $1.06, while Barnes & Noble shares were up 3.8 percent in afternoon trading. Borders are down about 69 percent since last September.

REARRANGING STORES

Much like Barnes & Noble, Borders sees its network of 506 stores as critical to winning over e-books buyers and announced steps to make better use of that space.

Borders bought out the leases of seven stores before their expiration and will continue to do so as needed. Interim Chief Financial Officer Glen Tomasczewski told Reuters Borders has about 40 leases coming up for renewal this year and next, but no plans to shut many stores.

Borders is set to complete the introduction of its "Area-e" digital shops, where it will display the e-readers it sells, at its stores by October.

"The customer prefers to buy electronic devices at retail because they want to touch them, experience them," Borders Inc Chief Executive Mike Edwards told Reuters in an interview.

In contrast to Barnes & Noble, Borders opted not to design its own e-reader, preferring to offer as many devices as possible to lure shoppers.

It currently sells six e-readers and said it would add others soon. As part of its strategy to catch up, Borders cut prices this week on some of the e-readers it sells. [ID:nN31229184]

Another key component of Borders' strategy to redeploy its floor space entails offering more non-book items and toys and games for children.

Barnes & Noble, which last week reported a quarterly loss, also said it would dedicate more store space to toys.

Borders has seen a number of top management changes this year. Tomaszewski stepped in for former CFO and Chief Operating Officer Mark Bierley, who resigned last week.

Edwards was interim CEO of the entire company for five months until financier Bennett LeBow, its largest shareholder, was named CEO in June. Ron Marshall quit as CEO in January after only one year at the helm.

LeBow invested $25 million in Borders in May giving the retailer breathing room as it contended with a heavy debt load. (Reporting by Phil Wahba; editing by John Wallace, Dave Zimmerman)