Is Borders the Next Circuit City?

Circuit City, once a well-known retail fixture, is no more. If it can't survive this holiday season's impending price war, bookseller Borders (NYSE: BGP  ) could be next.

Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Amazon.com (Nasdaq: AMZN  ) are all playing the "how low can you go" game to lure shoppers seeking hardcover best-sellers. That can't be good for bookstore rivals Borders and Barnes & Noble (NYSE: BKS  ) . The bricks-and-mortar book behemoths already face many disruptive influences, including the rising popularity of e-books. Handing penny-pinching shoppers great deals on hot books while they're bargain-shopping at their local discounter, or browsing Amazon.com from home, doesn't exactly help.

Even beyond that dire outlook, Borders must confront serious financial challenges. Check out how its key metrics stack up against those of some of its book-selling rivals:

Company Name

TTM Revenue Growth/(Loss)

TTM Profit/(Loss)

Debt/Equity Ratio

Quick Ratio

Borders

(13.2%)

($4.60)

210%

0.1

Barnes & Noble

(5.1%)

$1.28

0%

0.2

Wal-Mart

1.8%

$3.41

67.5%

0.2

Amazon

19.6%

$1.70

3.2%

1.0

All data from Capital IQ, a unit of Standard & Poor's. TTM = trailing 12 months.

Borders clearly still shows a nauseating loss, with revenue dropping at a daunting pace. Although Barnes & Noble also seems risky at present, at least it's still profitable, despite its own decreasing sales.

Borders' formidable debt load has been a major risk for a long time. The ruthless price wars this holiday season portends could make paying down that debt even more difficult. A quick ratio below 1.0 can be a red flag, particularly if a company's sales and profit margins are suffering mightily, and especially if it may have to deeply discount prices to clear out its inventories. For a very strong retailer like Wal-Mart, with a laser-focused supply chain, a low quick ratio is no problem. For Borders, it could be serious trouble. And if its major shareholder, Pershing Capital Management, withdraws its ongoing support, Borders' life could get even rougher.

In October 2008, I outlined three retailers I thought we might have to kiss goodbye. One was Circuit City. Borders and Talbots (NYSE: TLB  ) also made the list. Both have survived thus far, but both also have major shareholders who helped keep them alive, despite drastic difficulties in their businesses.

With unemployment at a multidecade high, and even employed consumers likely wanting to save money or pay down debt, this holiday season could be difficult for retailers.

On a more positive note, the chart data above might make you a bit jealous of Amazon shareholders. At a staggering 76 times earnings, the stock is admittedly pricey, even for the tech sector; fellow heavyweight Apple (Nasdaq: AAPL  ) commands a mere 32 times earnings. But the metrics above show that Amazon's in terrific shape in many ways, which represents security for long-term shareholders. However its stock price fares in the near term, Amazon isn't in danger of going away anytime soon. Too bad Borders can't say the same.

Amazon.com and Apple are Motley Fool Stock Advisor picks. Wal-Mart is an Inside Value selection. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a well-read disclosure policy.


Read/Post Comments (10) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On November 11, 2009, at 4:26 PM, catoismymotor wrote:

    I can't see how Borders is able to keep the lights on. Near home is one of their test market stores. They have reworked the whole store from rearranging the sections to carrying things that really have no place in a book shop. After gazing into my crystal ball I predict they will be dead by February 28, 2010.

  • Report this Comment On November 11, 2009, at 5:07 PM, EditorJim wrote:

    With major reductions in both per-store inventory and staffing, there's just no physical way for Borders to recover the losses in sales even if the economy completely rebounded tomorrow. With profit margins being squeezed by the price wars, it's doubtful that they can achieve the same kind of debt paydown achieved after the 4th quarter last year. If they can admit it to themselves (and investors), there might be a place for a leaner meaner operation of 300-350 superstores instead of the current 500.

  • Report this Comment On November 11, 2009, at 5:27 PM, mikecart1 wrote:

    You mean Borders hasn't closed yet LOL? I think all retail stores should be closed. I shop at none of them. I buy everything online for 1/3rd the price using internet discounts and sick shopping skills. The only store I go to that isn't on the internet is the grocery store hehe!

  • Report this Comment On November 11, 2009, at 5:38 PM, fifteenfifty wrote:

    I'll be sad to see them go. Not because I'm a huge fan (or detractor) but because I like to "waste" time browsing at the bookstore. Much like I used to like browsing at computer stores, when such still existed. If we are all left to shop online to have any selection (how many titles does your walmart carry?) we will all be diminished.

  • Report this Comment On November 11, 2009, at 7:00 PM, TMFMitten wrote:

    The wild card is the Nook. If it sells well, AND if the scannable coupons get people to come into the stores more frequently for redemptions, then maybe B&N has a chance.

    But in this environment, I don't see a future for two book superstore chains. And I'd count out B&N before I would Borders. B&N has always seemed kind of stodgy to me, where Borders' stores seem more welcoming and fresh and hip. Totally subjective, I know, but I just find the store layouts more inviting, and I think Borders' selection may be a little bit better -- and cheaper. Plus, you can search for stuff yourself using the kiosks at Borders, rather than wait in line at the help desk to ask if so-and-so book is in stock -- which is what you have to do at B&N.

  • Report this Comment On November 12, 2009, at 1:56 PM, TMFLomax wrote:

    Cato, agreed, it is kind of hard to fathom at this point! Maybe they should try a crystal ball section. ;)

    Mikecart1: "internet discounts and sick shopping skills" - nice! :)

    fifteenfifty: I also have some degree of nostalgia and every once in a blue moon I do go into a Borders and B&N for the browsing experience. But the truth is, if you want huge selection Amazon is usually the better bet; I've frequently not found what I was looking for even in a superstore. But you're also right that Wal-Mart will have a smaller selection and mostly bestsellers. How very important bestsellers ARE to the book selling business is yet another element that makes it super hard for Borders and the other big book chains though.

    TMFMitten: The nook is definitely an interesting piece of all this. And yeah, whether there really is a place for two book superstore chains at this point is a big part of the question. But it looks likely the ugly financial situation for Borders is going to be the deciding factor, which is unfortunate for Borders fans. Getting to EditorJim's point... there is an ugly situation for Borders in the near term. We shall see, though.

    Thanks for the comments, everyone!

  • Report this Comment On November 13, 2009, at 9:26 PM, tengrandchicago wrote:

    TMFMitten,

    Even if Borders were able to up their "friendly quotient" 1000%, they are going down. If you look at their cash flow performance over the past 4 quarters, you'll see a picture of impending trouble.

    The cash they generate from operations is completely sucked away by repayments to their credit lines. Look at their cash on hand and liabilities over that same time period... nothing is moving.

    They are essentially staying in business by making just enough to pay their liabilities. Principal isn't moving down, which means less corporate focus on growth opportunities like an answer to the Kindle and Nook. It's kind of like the guy down the corner street who borrowed too much and bought a home and Cadillac Escalade. They stayed alive by making just enough to pay the interest. Eventually, they slipped up on their ability to generate enogh cash and imploded...

  • Report this Comment On November 16, 2009, at 4:35 PM, scrunch123 wrote:

    This was on a Borders employee website. Might give you insight to the internal attitude of company.

    Beat the dead horse

    Years ago I used to take on extra tasks to help my team. Now we have no team.

    I used to give 110% because my GM always noticed. Now I have no GM.

    I used to volunteer for overnights because I knew the managers would remember it when it came time for reviews and raises. Now we have no raises.

    I used to come in early and stay late because I loved Borders and wanted it to succeed. Now I'm ashamed to work here.

    I used to hope for a promotion. Now I'm trying to get out.

    I used to enjoy calling my "regulars" by name and helping them find new books to read. They never come in any more.

    I used to work for booksellers. Now I work for a grocery hack, a hedge-fund sleaze, and the lackeys they stuffed the Board with.

    I used to work hard to keep my job. Now I know that nothing I do will save it.

  • Report this Comment On November 16, 2009, at 5:06 PM, scrunch123 wrote:

    I got this off a Borders employee site. Might give some insight into attitudes internally.

    Beat the dead horse

    Years ago I used to take on extra tasks to help my team. Now we have no team.

    I used to give 110% because my GM always noticed. Now I have no GM.

    I used to volunteer for overnights because I knew the managers would remember it when it came time for reviews and raises. Now we have no raises.

    I used to come in early and stay late because I loved Borders and wanted it to succeed. Now I'm ashamed to work here.

    I used to hope for a promotion. Now I'm trying to get out.

    I used to enjoy calling my "regulars" by name and helping them find new books to read. They never come in any more.

    I used to work for booksellers. Now I work for a grocery hack, a hedge-fund sleaze, and the lackeys the stuffed the Board with.

    I used to work hard to keep my job. Now I know that nothing I do will save it.

  • Report this Comment On December 01, 2009, at 9:32 PM, Jeffsdate wrote:

    Borders's inventory management stinks. I would much prefer to buy my books there, rather than wait for Amazon to ship them, but Borders never, never, never has what I want in stock. (Basically, if it's not on the current top-20 bestseller list, forget it.) They don't even carry enough copies of the NY Times so that I can count on getting one there! So I really never go there except to flip thru their magazines. It's too bad, but they've done this to themselves.

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