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Borders Loss Doubles

Borrowing Limits Cut

Published: 12/09/2010 04:11pm

Borders reported its financial results for the quarter ended October 30 on Thursday, and they weren’t pretty.  The company’s loss was $74.4 million, nearly double its loss of $37.7 million in the year ago period.  Sales declined 17.6%, with same store sales down 12.6%.  The difference was primarily due to store closings; the company closed 204 stores since the year ago quarter, almost all “small format” stores (i.e., Waldenbooks). 

 

The 12.6% same store sales declines, up from a 6.8% decline last quarter (see “Sales Fall, Losses Increase at Borders”), was primarily attributed to the adult trade book category.  Digital and kids toys and games were both up, reflecting increased space allocation, display, and inventory.  Digital was up 93.6% vs. a year ago; kids toys and games were up 6.6%.  Kids departments were expanded in 51 locations during the quarter. 

 

Building out the new departments also caused disruption to store flow, according to the report, which contributed to over-all sales declines. 

 

Declining profitability was largely attributed to decreased margins due to lower sales per store, which raised the percentage of sales attributed to costs.

 

Perhaps most concerning was the fact that Borders’ borrowing limits under its revolving credit facility were reduced due to “a third party valuation that lowered the estimated liquidation value of our inventory.”  The company is trying to find places to borrow more money, but “there can no assurance that we will be able to obtain adequate financing or that our other initiatives will be successful.”  It is at the “detailed discussions” stage of obtaining new financing to cover its needs through early 2012.

 

One place Borders has been going for cash is from its balance sheet, where it has reduced inventory by $233.7 million vs. the year ago period.  It attributes the decline both to store closings and to more efficient inventory management, which it says has reduced inventory without reducing in-store stock levels.   

 

Despite its ill health, Borders announced this week that it was seeking to acquire Barnes & Noble using financing from investor William Ackman (see “Borders Considering Offer for B&N”).  One outcome from any combination of the two companies, given same store sales declines, would undoubtedly be a massive wave of store closings to remove excess capacity.  Such a combination could occur under a variety of scenarios beyond an acquisition of B&N by Borders.  And, of course, if Borders sales continue to decline, it will have to reduce the number of its stores regardless of any combination. 

 
 
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