The Roots of Borders’ Troubles Run Deep – published in January of 2011 in the SB News Press

Borders started as a two-room used bookstore in the college town of Ann Arbor, Michigan, by two brothers – Tom and Louis Borders. The company’s first superstores offered more than 100,000 titles at discounted prices, but sales advanced rather slowly until 1992 when it was acquired by Kmart.  The Kmart acquisition marked the beginning of Borders’ problems.

Kmart already owned Waldenbooks, which was doing poorly at the time.  They thought by purchasing Borders and combining the two companies, they could gain some economies of scale and increase sales and profitability.  Unfortunately, the acquisition caused a mass exodus of executives, which effectively gutted the management team and left Kmart holding the pieces of two disorganized and troubled companies.  It took Kmart three years to get the combined companies stabilized.  Facing their own problems, and after only three years of operating the combined firm, Kmart decided (under pressure from their shareholders) to spin-off their book assets in an IPO (initial public offering).  This IPO basically created what is Borders Group today.
Borders could have been investing in an online bookselling website during that lost three years.  Had they done so, they might have crushed the fledgling Amazon.  In the late 1990s, while Amazon built momentum toward becoming the dominant player in the online bookselling space, Borders was busy opening stores overseas, in the UK, Ireland, New Zealand, Australia, Singapore and elsewhere.  Completely missing the boat, Borders didn’t launch its e-commerce site until 1998 – three years after Amazon, and a year after Barnes & Noble (which also totally missed the boat in comparison to Amazon).
The Borders online business was a complete bust, generating only $5 million in sales its first year after launch, while Barnes & Noble generated $70 million the same year, and Amazon garnered $610 million in sales that year.  Just three years after establishing their Internet business, Borders gave up and closed their e-commerce site.  Borders paid Amazon an undisclosed amount to develop a cobranded site, and although Borders was a partner and received a percentage of the sales, Amazon did all the work, providing fulfillment, content, customer service, and inventory management.  Borders finally decided to take another shot at running their own site in 2007, when they created their e-commerce division.    
In 2000, Borders hired Merrill Lynch to “explore strategic options,” which is code for “we want to get bought.”  Unfortunately their timing was poor (again), and after no one came forward with an offer, they quickly backpedaled and took the company off of the market. 
Starting in the late 1990s and resurfacing several times, (including just recently), rumors of a merger between Borders and Barnes & Noble have been widely circulated, although nothing has, to-date, come of these rumors.  It isn’t clear whether this would help either company, both of which are suffering at present, and both of which just closed their Santa Barbara locations.  One would think the experience Borders had with Waldenbooks would inform their thinking, but the rumors persist.
After a reorganization that involved a round of layoffs, Borders announced, in October 2000, plans to open 55 new stores each year over the next six to eight years, essentially doubling its store count from 350 superstore locations to about 700, with a cost of about $130 million annually.
For the ten-year period, from 1992 through 2002, Waldenbooks nosedived from 9.5% of the market to an anemic 4.8%.  Lighter mall traffic was blamed for this decline, although many other retailers did not suffer the same fate.  In 2000, there were 869 Waldenbooks stores, but by 2002, that number had dropped to 778.  By 2004 Borders had begun converting some Waldenbooks locations into “Borders Express” stores.  By 2007, Waldenbooks stores had dwindled to just 300 locations, with even more closings in 2009, chopping the number of locations (Waldenbooks and Borders Express combined) to just 150 or so.    
During Borders’ efforts to stop the bleeding at Waldenbooks, in 2006, a very highly respected hedge fund manager, William Ackman, through his Pershing Square Capital fund, bought 11% of Borders.  The stock was trading around $20, and Ackman made the rounds with all of the typical media stations extolling the growth potential of Borders and his expectation that the stock could (and would) trade as high as $36 per share.  Unfortunately for Ackman, Borders’ stock price never moved above about $25 per share, and quickly began a long, slow retreat from about March 2006. 

In 2007, Borders had suffered steady mediocrity in its sales, prompting them, no doubt under intense pressure from Ackman and other investors, to undertake additional measures to try and jump start their sales.  They put their international operations on the block, but eventually were forced to simply shut them down.  They also remodeled stores, reworked their customer loyalty program, launched the new website (ending their partnership with Amazon), and continued their dismantling of Waldenbooks, (as stated above).  By this time, Walmart, Costco and other discounters had either entered or ramped up their book business, increasing the competitive pressure on Borders. 
Around this same time e-readers were introduced, and once again, Borders missed a huge opportunity to get out front with their own device.  Instead, they offered the Sony e-reader.  Unfortunately (yes again), their deal with Sony was not an exclusive, as Sony’s e-reader was also available through a host of other retailers, such as Best Buy, Circuit City, and even discounters like Target.  Barnes & Noble didn’t immediately jump on the e-reader band wagon, but they did introduce their own device, called the Nook, around the end of 2009, which became their best-selling item of all time.  
Borders did partner with Sony to co-brand their e-book website, and later also offered the Kobo e-reader, rolling out the device in stores in June 2010. But, it wasn’t until the summer of 2010 did Borders launch their own e-book site.
All of the remodeling, store closures, new websites, and the like seemed to only make things harder for Borders and worse for their shareholders.  Even before the financial markets imploded in late 2008, after the Lehman Brothers failure, in the first quarter of 2008, Borders was already experiencing credit problems.  They were forced to suspend their dividend, and begged a cash injection from Ackman’s fund of $42.5 million to keep the doors open.  They also, once again, put themselves up for sale, and Barnes & Noble was once again rumored to be interested in merging.  Yes, once again Borders took themselves off the market, so nothing happened.
Throughout 2008 Borders aggressively closed stores and cut employees to reduce costs and try to preserve cash flow.  In January of 2009, they replaced George Jones with Ron Marshall as CEO, a turnaround specialist.  At the same time, their stock cracked the $1 level, generating a delisting letter from the New York Stock Exchange.  Marshall resigned after only one year on the job, sparking another round of top management departures. 
During this time, Borders was able to repay the Pershing Square loan, but only because they were able to arrange for a $700 revolving Line of credit and another $90 million term loan (replacing debt with more debt).  Also another equity investor, Bennett LeBow, bought a 15.5% stake in the company for $25 million around this same time, which made him their largest shareholder (Lebow became CEO a few months later). 
Late last year, Ackman championed a deal for Borders to buy Barnes & Noble for $16 per share, or a total of almost $1 billion (Barnes & Noble had put themselves on the market earlier in 2010).  While the ink wasn’t even dry on this offer, Borders announced that they were, once again, out of cash. 
Borders just announced, even after the holiday season, (which should have been a time of strong sales for them), that they did not have the money to pay some of their vendors.  This of course was followed by these same vendors (and others) announcing that they had ceased all shipments to Borders. 
Scrambling to stem the tide of negativity, Borders met with all of the top brass at the major publishing companies, presenting their game plan for getting things back on track.  They also announced more layoffs, a closed distribution center, and more executives walking out the door. 
The latest news from Borders is that they are working on a $500 million credit facility from GE Capital, $200 million of which they desperately need to pay-off existing senior debt that is due.  So far, there has been no announcement from GE as to the status of this loan. 
Can Borders survive?  Does anyone care anymore?  I think the bigger and more interesting question is: What is the future of the book industry?  The trend seems to be pointing to more e-books, blogs, discussion boards, etc.  Do people even have the patience to sit down and read a nook anymore?  I hope so, but in our current world on texting, multitasking, high energy, fast-paced video games, and multiple conduits for information and entertainment, it’s anyone’s guess as to whether or not the hardcover and soft cover will survive.
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  1. Reply Abram says

    >Do you have any sources for this, or is it just collected from your own reading of news clippings over the years… In particular, I'm finding it hard to find anything authoritative about the KMart's internal struggle merging the two brands, and the management exodus… Anything you can think of would be helpful….

  2. Reply Craig D. Allen, CFA, CFP, CIMA says

    >The best sources are their SEC filings and press releases. You can clearly see the lack of performance of the brand and the steps they are taking to consolidate the business because it isn't working.

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