Borders bookstoreBorders (BGP), the country's second-largest book retailer, had been counting on a Christmas miracle to rescue it from deep financial doldrums. But the holiday season played Scrooge instead. Now, the liquidity shortfall Borders warned might happen -- and a possible bankruptcy it didn't need to warn worried investors about -- seems ever more certain in 2011.

As first reported on Dec. 30 by industry newsletter Publishers Lunch, Borders has been telling some of its key vendors -- including some of the largest publishing houses -- that it's delaying year-end 2010 payments for inventory. One of those houses is Hachette Book Group (LGDDY), whose CEO David Young told the The Wall Street Journal that Borders has indeed delayed its most recent payment to the publisher, adding that Hachette "will decide shortly whether to continue shipping new books to Borders."

That decision will only come after Hachette, as well as other publishers, meet with Borders executives. But one unnamed major publishing house has already made the call to stop shipping books, according to Publishers Weekly.

No Surprise

In a statement, Borders spokesperson Mary Davis indicated the payment delay was a function of already-disclosed plans for securing fresh credit refinancing, something the company desperately needs. "Borders has determined that it is necessary to restructure its vendor financing arrangements and is delaying payments to certain of its vendors. Borders has notified these vendors and will be working with them to restructure their arrangements with the company."

The news itself isn't surprising, since Borders itself made clear how much trouble it was in earlier this month with its most recent quarterly report: a $74 million net operating loss, steep drops in comparable-store sales and the stated need to quickly shore up liquidity lest it violate credit agreements, a statement it on Dec. 30.

There's no getting around that these corporate communications are the most ominous yet that have come from Borders' headquarters. Considering it has consistently lost money every quarter for the last three years and relied on both Pershing Square Capital CEO William Ackman and company CEO Bennett LeBow for 11th-hour cash infusions, the news of vendor payment delays can't possibly inspire confidence among investors. To wit, Borders stock dropped Friday from $1.16 to just 96 cents -- a value that, if it sticks, would get the company delisted from the New York Stock Exchange.

Failed Strategies

What, then, of that fourth quarter, when holiday sales were supposed to bolster Borders' fortunes? The retailer will delay reporting the official results as late as possible, as it did with the third quarter.

But clearly, the strategies Borders employed simply didn't work: It tried selling e-readers that have nowhere near the market share of Amazon's (AMZN) Kindle and Barnes & Noble's (BKS) Nook; its redesigned website crashed at the busiest holiday times; and it made a strong push to get Borders' customers to sign up for Rewards cards offering steep discounts to give the illusion of brisk sales. All these moves ultimately proved only to push Borders to the brink.

As a result, its traditional end-of-year push to return unsold inventory on a mass scale to publishers for full credit won't happen this time around. Instead, Borders has reversed course, directing employees to postpone returning volumes of books that aren't selling and that take up valuable shelf space. Chatter on Borders employee message boards indicate the official reason is to maintain inventory levels and not to waste money.

The directive's timing, however, naturally led to another, more obvious conclusion: With publishers saying no, Borders needs to keep what inventory it has to keep shoppers coming in -- and to convince its lenders and potential investors to keep pumping cash into the troubled retailer.

A No-Win Situation

The publishing industry, however, finds itself in a tough spot. Do publishers continue to supply books to Borders, knowing the company, as it stands now, won't be able to turn itself around, let alone turn a profit? Or do they go along with the house that's already refusing to supply stock to Borders and watch it go into bankruptcy, either the preferred Chapter 11 or the more dire Chapter 7?

Choosing the former means delaying the inevitable. But forcing the dissolution of Borders means a sizable chunk of the trade book business, somewhere around 10% of overall market, will vanish overnight. And that will affect publishers' bottom lines and force them to make decisions they may not have wanted to, or would regret, in order to keep their own balance sheets as close to the black as possible.

Even if Borders conjures up another rabbit from the same overextended hat and convinces some new investor to sign on, the clock is ticking fast. When it reaches zero, a new phase in the publishing world begins, for good or for ill.

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