For Investors, Lessons from the Death of Borders
Jul 19th 2011 4:00PM
Updated Jul 22nd 2011 8:57AM
If bankruptcy marked a very sad Chapter 11 for Borders (BGPIQ.PK), the marketplace has now written an even more tragic epilogue for the big-box bookseller.
Borders plans to start liquidating the rest of its stores Friday. The company will probably disappear completely from the retail landscape by September.
On a purely emotional level, this is a sad development for bricks-and-mortar booksellers and book lovers alike. I'm sure most of us have spent plenty of time browsing the aisles of Borders and its rival Barnes & Noble (BKS) over the years.
That said, emotional responses don't change hard reality. Borders' financial condition and weak competitive positioning eventually finished it off.
Believe it or not, there are some bright sides to Borders' death. While the bookstore may be shutting down, its long and tragic tale provides plenty of fodder for investors. Use these lessons to ensure that your future investments have a happier ending.
1. Act Like Everyone Is Out to Get You – Because They Are
Amazon.com's (AMZN) very first step into the bookselling scene boded ill for big-box booksellers like Borders. Suddenly, any title readers' hearts desired could be quickly delivered to porches and front doors across the country, often at a major discount.
Bricks-and-mortar retailers were at a disadvantage, since physical shelf space is by its very nature limited. The big-box chains had a financial incentive to stock best-sellers, since they appeal to the greatest number of consumers.
But e-books and e-readers like Amazon's Kindle weren't the only problem for Borders and its book-centric peers: Rivals of all stripes also carry those same best-sellers, including formidable one-stop shopping discounters like Target (TGT), Wal-Mart (WMT), and Costco (COST). This gave consumers one more reason to skip the bookstore and shop for beach reads while picking up fare for picnics. In the end, Borders lost far too much blood (and competitive traction) in this dog-eat-dog industry.
2. Don't Believe the Hype
For years, Borders had an interesting asset: major shareholder William Ackman, founder and CEO of Pershing Square Capital Management. Ackman often acted as an evangelist and even swooped in to play savior, throwing financial lifelines to the long-struggling company.
Ackman apparently believed the bookseller would ultimately turn things around, telling CNBC in February 2010 that he thought a Borders bankruptcy was a "low probability event." He even described Borders as a "more attractive risk/reward than Barnes & Noble."
Many investors likely felt comforted by that expert opinion at the time. Some might have thought this meant Borders was a deep value stock. Reality proved otherwise.
Sometimes, even the smartest people have financial and personal reasons for wanting to believe in the best-case scenarios. Investors must always use caution when weighing others' opinions, even when those people are highly respected members of the investment community.
3. Borrowers and Gamblers Beware
Taking on too much debt proved one of Borders' worst moves. It entered the recession owing too much money to creditors. Slowing or decreasing sales, high debt obligations, and a sluggish overall economy can become a toxic, and possibly deadly, combination for any company.
After Borders' bankruptcy, investors still traded its beaten-down stock. They were probably banking on a white knight coming in and buying up what was left. Obviously, that was a dangerous gamble on a fairly outlandish fairy tale ending.
Severely beaten-down stocks are often beaten down for a very good reason. Bankrupt companies are incredibly risky bets. Investors should never forget they could be left with what such a stock's really worth: $0.
4. One Man's Demise is Another's Opportunity... Eventually
Borders' demise should be a benefit to rivals over the long haul. However, in the near term, it makes life difficult. A desperate, drowning company can pull others down as well.
Barnes & Noble recently reported that Borders' liquidation sales had hurt its own quarterly sales and driven the surviving chain to a worse-than-expected quarterly loss.
Rivals will likely see little benefit until Borders is completely gone, since its going-out-of-business sales will probably continue to pull book-buying customers into its stores.
However, once Borders has shuttered its last store, it should spell opportunity for rivals (public, private, and mom-and-pop bookstores alike). It could even be an opening for innovative new retail concepts that craft creative ways to lure in bibliophiles (and their book-buying dollars).
Hope for More Heroic, Inspiring Stories
Try to shake off the admittedly depressing elements of Borders' final death rattles. Instead, remember that creative destruction is part of the marketplace. It often results in better futures than we can foresee or imagine, even when the landscape looks bleak.
Borders' demise could pave the way for far more inspiring and heroic tales of businesses that spark a heightened passion for reading, better serving book lovers of all kinds. Better yet, these new ventures could become far better investments than Borders ever was.
Motley Fool analyst Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Costco Wholesale and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Amazon.com, Costco Wholesale, and Wal-Mart Stores and creating a diagonal call position in Wal-Mart Stores.