Here is their latest quarterly filing.
First, to get your bearings straight, here is what Borders operates.
[QUOTE=10Q]
At October 30, 2010, we operated 674 bookstores under the Borders, Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores, including 671 in the United States and three in Puerto Rico. In addition, we operate a proprietary e-commerce web site, Borders.com, which was launched in May of 2008.
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A lot of time in these types of discussions people will throw out simple comments like how busy or not busy the store is or how can they compete with online retailers on price.
Those types of analyses sort of miss some of the big items. Clearly, operating online should be a lower margin, higher volume business than in a physical store. A company like Amazon should be able to sell many times more items, but making less per item than a company like Borders. The thought would be that a premium would be paid for being able to physically go in a store and sample the merchandise. That’s not the case, Amazon has a gross profit margin of 23.6% versus 17.2% for Borders. Gross profit margin is simply the profit after the cost of goods sold divided by the sales. This should’t be so, and suggests that something else is going on like the product mix is not really that similar or that Amazon not only sells for a cheaper price but is able to purchase for a significantly cheaper price. As Borders themselves say:
[QUOTE=10Q]
Also contributing to the decline in the gross margin rate were increased product costs of 1.0% as a percentage of sales, mainly due to Borders.com sales, which achieve a lower margin rate than bookstore sales.
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Why is online book sales a lower margin business for Borders but a higher margin business for Amazon?
Then we get to the real kicker, since Amazon is exclusively online, they have significantly cheaper G&A as a percentage of revenues. Amazon’s G&A was 1.5% of revenues while Borders was 27.6%. These are exact comparisons as Borders broadly groups multiple types of expenses in with G&A, but it really shows that their business model simply doesn’t work. The store costs and salaries they have to pay do not result in enough sales at a high enough margin, period. Clearly the question that needs to be asked is if they can reduce this expense significantly through layoffs, moving into less expensive leases, and other means without a significant further deterioration in the volume of their business.
Clearly this is a company that is in a major period of transition. As they themselves say:
[QUOTE=10Q]
Our business strategy is designed to address the most significant opportunities and challenges facing our Company. In particular, our challenges include commoditization in our primary product categories and an extremely competitive marketplace (including both store-based and online competitors), product formats that are evolving from physical formats to digital formats, and our own loss of market share. These factors, among others, have contributed to declines in our comparable store sales measures and in our sales per square foot measures over the last several years. These declines have, in turn, negatively impacted profitability.
The U.S. book retailing industry is a mature industry, and has experienced little or no growth in recent years. Books represent our primary product category in terms of sales. Rather than opening new book superstores, we believe that there is greater near-term opportunity in improving the productivity of existing superstores, increasing our market share in eBooks and in enhancing Internet-based sales channels. In particular, we see potential in transforming our existing superstores by reducing space currently used for physical books and reallocating that space for non-book product that would be compelling for our customers, including larger sections devoted to electronic book readers (“eReaders”), educational kids toys and games, larger cafes and expanded gift & stationery offerings.
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Basically, they are experiencing a declining market share in a no-growth industry. Obviously that’s a horrible position to be in. As a result, they are in a shrinking mode.
[QUOTE=10Q]
We have effectively curtailed our new store program. In addition, we continue to evaluate the performance of existing stores, and additional store closures could occur in cases where our store profitability goals are not met. During 2009 we closed 219 bookstores consisting of mainly small format stores. We believe that the Company has the potential to operate mall-based stores profitably, and to that end have signed short-term lease agreements for desirable locations, which enables us to negotiate rents that are responsive to the then-current sales environment. We will, however, continue to close stores that do not meet our profitability goals, a process which could result in additional future asset impairments and store closure costs.
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[QUOTE=10Q]
On July 20, 2010, we completed the sale of all of the outstanding shares of Paperchase Products Limited (“Paperchase”) to an entity controlled by Primary Capital Limited, a U.K.-based private equity firm. Paperchase, which prior to the sale was a wholly-owned subsidiary of the Company, is a retailer of stationery, cards and gifts based in the U.K. On June 10, 2008, we sold all of our bookstores in Australia, New Zealand, and Singapore. On September 21, 2007, we sold bookstores that we owned and operated in the United Kingdom and Ireland. We have accounted for the sale of these operations as discontinued operations. These disposals resulted in a gain of $8.2 million for the 39 weeks ended October 30, 2010. The operations of Paperchase resulted in a loss of $2.4 million for the 39 weeks ended October 30, 2010. These disposals are discussed, along with several retained lease guarantees and certain tax indemnifications, under the heading “Off-Balance Sheet Arrangements” within this Management’s Discussion and Analysis.
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Of particular note, we know they have delayed paying some of their vendors. This is particularly troubling for them as:
[QUOTE=10Q]
We rely on vendor credit to finance approximately 44% of our inventory (calculated as trade accounts payable divided by merchandise inventories). There can be no assurance that our current vendor credit levels will be maintained.
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How likely do you think vendors are going to be to extend trade credit when Borders isn’t paying them back on time. The likelihood is that they are going to be required to post margin with some of their larger vendors, which they may be unable to do.
Now, I think they are doing some of the right things, but I just don’t know if it will help. Further, is a reorganization through bankruptcy really going to solve any of their problems? From my standpoint, it’s not simply an issue of onerous leases or too high of a debt load that is causing them problems. They simply are incapable of generating any operating profit. You could reduce their interest payments to nothing and they still lose significant money.
It’s worth saying that despite all of the moves they have done over the past couple of years, things are getting worse for them. For the first nine months of this fiscal year, they lost $185MM versus a loss of $169MM for the prior comparison period. They’re book equity is now -$40.8MM with their biggest debt being trade payables.
They seriously need to figure out what they make money on (may be small mall stores and internet) and lose everything else. Regardless, I think they will go bankrupt and we will see a significant reduction in the number of their large retail stores, not a simple reorganization or restructuring of the balance sheet.
