Does Borders (NYSE: BGP) have what it takes to emerge from near-bankruptcy and rival the stiff competition of Barnes & Noble (NYSE: BKS) and Amazon (Nasdaq: AMZN)? With some major tweaks, Borders just might have the potential to become profitable again and keep pace with its industry peers.

The amount of investors taking a short position in Borders from December 15 to January 14 has nearly doubled as the confidence in the retailer fell dramatically. As Benzinga readers are aware, Agree Realty (NYSE: ADC) disposed of Borders in two of its real estate locations in order to diversify its holdings. In response to the disposal, shares in Agree Realty rose by 0.5%. The message is clear: The market expects Borders to collapse into bankruptcy in the near future. But is bankruptcy really the end to the story, or is there a light at the end of the tunnel?

Where did Borders go wrong? Nearly identical competitor Barnes & Noble is not going bankrupt, and there is still room in the market for booksellers like Amazon, so why is Borders struggling so much? The issues seem to stem from Borders' inability to keep pace with technology and consumer demands. Barnes & Noble responded quickly to the Amazon Kindle with the Nook series, according to The Street. IBIS analyst Mary Gotaas says Borders simply sold the Sony and Kobo e-readers instead of developing its own product. Gotaas also says it was a mistake for Borders to abstain from e-commerce, as the company allowed Amazon to handle its online sales. On the other hand, Barnes & Noble created its own system for internet sales. The last mistake Gotaas cites is that Borders did not begin its own internet sales until 2010, whereas Barnes & Noble began its internet sales in 2009.

Borders has some definite problems with its balance sheet. Its short-term liquidity is much worse than Barnes & Noble's: the quick ratio is 0.20 for BKS and only 0.12 for BGP in 2010. This may be a likely reason BGP is facing its credit crunch and tense relations with publishers. Another ratio to compare the two is the total debt ratio. BGP uses 89% debt, whereas BKS uses 76% debt. BKS wins again with inventory turnover -- 3.01 compared to 2.51 for BGP.

Borders is severely beaten down at the moment, and for legitimate reasons. Failing to keep pace with technology and competitors is a recipe for disaster, as can be determined from Borders' balance sheet. To stay afloat, Borders will need to make some big changes. Borders' finances much of its activity from debt, which is advantageous if the company has the capabilities to pay it off. However, the ratios show that Borders has inadequate liquid assets to cover the extraordinarily high debt ratio. Perhaps management should concern itself with inventory turnover by focusing more on e-commerce and becoming a more noticeable online bookseller.

Borders could also benefit from using better marketing skills. Consumers need to know that Borders is changing, and changing to meet their needs as well as the industry's expectations. Borders may consider closing more retail stores to cut costs and focus on the internet side of business.

While the books are not promising for Borders, the potential is there for the company to remain afloat. With some large systematic changes, and an overhaul of the business model, Borders can stand to live another day alongside Barnes & Noble and Amazon.

Disclosures: long BGP

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