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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aaron

hahah, yEAH RITE! when have you ever seen any one incorporate in a borders store! what ever! they wont talk to the low life 8.00 per hour employees! They are to busy thinking they now everything and will figure it out on there own. PLEASE! Another recycle recirculated CEO who listnes to know one but his buddies he pulled in from another company he had to leave from before he got fired. This is the new way of business folks, recycled and recirculated **** head who are over paid. Just like in footbal. Recycled coaches. Wake up and see that these elite are destroying business to line there pockets. Bottom line in me me me me. Not all you 8.00 per hour schlubs who bust ass helping out annoying costumers and the handicap (bless there souls) who hang out in your stores all day. Peace OUT.

See full article from DailyFinance: http://srph.it/fGeRNT

February 15 2011 at 4:00 PM Report abuse rate up rate down Reply
Jedbu

I remember when there was just one store-the wonderful lived-in one near the U of M campus in Ann Arbor. Loved shopping there (used to drive up from Toledo) and still love the chain but if they keep up these shenanigans I'm afraid the final chapter is coming soon. The store in Westwood, CA is closing-how much longer?

January 06 2011 at 3:46 PM Report abuse rate up rate down Reply
ibefreed

Just a sign of the times that bookstores are dwindling, while an endless number of mindless video games, pathetic cartoon movies and mind-numbing television all supplant the written word as a means of entertainment, learning and culture. That being said, their business model is a no-win. Why pay $25 for a book you can get a couple of months later at a Salvation Army or Goodwill thrift store for $1.50 hardback, $.45 paperback?

January 03 2011 at 4:33 AM Report abuse rate up rate down Reply
rchrdheyheyhey

The author of this article is Sarah Weinman,

Sarah Weinman writes crime fiction columns for the Los Angeles Times and the Barnes & Noble Review, and contributes to publications including the Wall Street Journal, the Washington Post, Maclean’s, and the Guardian. Visit her at sarahweinman.com.

"....and the Barnes & Noble Review..."

A contributor to B&N writes articles about their largest competitor?

January 03 2011 at 1:47 AM Report abuse rate up rate down Reply
mimido78

Stopped shopping there 2 years ago when they would not take back a gift I received WITH a Borders sticker on it, since I had no receipt. All I wanted was to exchange it because it was a duplicate. RIP

January 02 2011 at 7:18 PM Report abuse rate up rate down Reply
1 reply to mimido78's comment
pozzy5

Being an employee at Borders The policy for taking those books back are we take them back and give you credit for the lowest amount it was sold in the last 60 days. they were not doing their job. sorry about that. you sho uld have gotten your credit.

April 25 2011 at 9:16 PM Report abuse rate up rate down Reply
Richard

My God not the final chapter. Some has to wake up in Ann Arbor. So much that be done to save Borders so much. Again wake up !!!! LeBow get the lead out and save the best book seller there is. What they need to do is listen to sales managers on the front lines. Get out and talk to your front line empolyees.

January 02 2011 at 5:40 PM Report abuse rate up rate down Reply