Publishers Keeping An Eye on Borders

Publishers had a wide range of reactions following last week's dual announcements from Borders Group that it is considering selling the company and had also received $42.5 million in financing from Pershing Capital Management, its largest shareholder, which has also offered to buy the company's international operations for $125 million. Borders executives said the capital infusion will give them time to fully explore all strategic alternatives, while also providing the necessary capital to continue to implement their strategic plan, which they said is working, albeit slower than expected, due in part to the poor economy. And CEO George Jones and CFO Ed Wilhelm both noted that the new financing should ease any concerns vendors may have had about the chain's financial health.

No publishers contacted by PW said they had stopped shipping books to Borders, nor did any have plans to stop. Several, however, acknowledged that they have been monitoring Borders's finances, which they will continue to do despite the new financing. “We are worried about them,” said the head of one major house. “They got this financing at 12.5% interest.” The high rate being paid on the $42.5 million loan was also questioned by several analysts, but Borders defended the transaction, noting that, with the tight credit market, other financing was impossible to get or even more expensive than the Pershing loan. Another publisher noted that ever since the AMS bankruptcy, publishers are keeping a much closer eye on all accounts, and since “Borders isn't selling as many books as we would like,” its financial health has come under closer scrutiny. “The industry has a huge receivable with them,” the head of the major house said, “and everyone is watching very carefully.”

One of the most concerned about the new developments was a midsize publisher who said Borders's problems show “that the bricks-and-mortar equation is in real trouble.” Borders is the third largest account for this publisher, trailing Barnes & Noble and Amazon. The publisher, like all others, was concerned about who could end up owning Borders if it is sold. Unsurprisingly, no publisher wants to see Barnes & Noble buy the company, something B&N COO Mitchell Klipper wouldn't rule out. “We haven't been approached by Borders's investment bankers,” said Klipper in response to a question during B&N's year-end conference call. “If we are, we'd certainly take a good look at the company and put it under review.” But as one publishing head noted: “You have to hope that if it is sold, an independent group buys it and it's not merged with another group of book retailers. We need more outlets, not less, in this business.”

Several publishers also used the news to criticize Borders's plan to sell more books face-out. “They are cutting out thousands of titles in the plan they have for face-outs, which will generate returns to all publishers,” one major publisher said. “There is no real reason to not spine-out backlist titles from authors that have many books.” A smaller publisher that has done well with Borders because of its support of backlist also saw the move toward face-outs as a bad one, but was happy to hear that Borders was finally up for sale. “Everyone's been waiting for Borders to be sold,” he said, adding that even if the chain remains independent, the review of its operations should put it in a stronger position than it is now. “We need two viable chains,” he said, noting that he would like Borders to decide what type of chain it wants to be. Whether Borders ends up focusing on the new concept store or superstores or Walden, “we need to know what the playing field is,” he said.

Book sales actually fared rather well in the fourth quarter, with same-store sales at the superstores up 3.2%; music sales, however, continued to plunge, falling another 14.2% on a same-store sales basis in the period. The retailer is continuing to allocate space previously devoted to music to other products and reducing inventory.

Borders gave no hint that it was cutting back on efforts to implement its new strategic plan; Jones said that the company will still roll out 13 new concept stores this year, and the new Borders.com Web site is on track to go live before the end of the first quarter. There are no plans to open any traditional superstores this year and the company will continue to aggressively reduce the number of Walden outlets, now at 490, in the year. The retailer will also be more focused on improving the bottom line and on generating cash; to that end it has suspended its dividend and will cut capital expenditures from the $145 million spent last year. The company will be looking to reduce costs in its headquarters, stores and supply chain during the year.