Borders operating losses increase

[Doug Pardee]

Publishers Weekly reports that Borders showed increased losses on continuing operations in their fiscal April vs. fiscal March — $32.1 million vs. $24.3 million. Considering that they're now running fewer (and supposedly the more profitable) stores, and that revenue was up from $165.5 million to $173.1 million, this is not good news. $8 million increase in revenue, but $8 million increase in losses. The big factor was in cost of merchandise sold, up from $139.9 million to $165.6 million.

Revenue of $173.1 million with cost of merchandise sold of $165.6 million? And as far as I can tell, this isn't taking the store closings into account: there's a separate item of $98.4 million for "reorganization items, net".

Added: I'm no accountant, so it's possible that this is a financial dodge to write off additional expenses before they emerge from bankruptcy (assuming that they do). Does anyone know if that's a possible explanation?

[Mira]

That is strange.

What is costing them more? And how can they hide it? Won't everything be examined closely during bankruptcy?

Wasn't Borders asking to give themselves bonuses in order to retain the loyalty of the executives? Was that approved?

(I can't tell you what a wonderful idea that was! Makes me want to become an executive and run a business into the ground, so I can get a five million dollar bonus).

Could that be the hidden cost?

[Doug Pardee]

What's costing them more is buying the stuff (books, etc.) that they're selling. Why, I don't know.

The bonus plan was approved by the bankruptcy court, but bonuses will only be paid after Borders successfully emerges from bankruptcy, or is bought out by another party who will continue to operate Borders. It's only $6.6 million anyway, which is less than what Borders lost in one week in April.

[Doug Pardee]

Oh, and there's this, extracted from a Borders press release yesterday:

beginning June 1, both the Borders eBook store and Borders eReading app will be branded Kobo ... Beginning June 1, customers with the Borders app will be able to easily move their Borders eBooks to their new Kobo eBook library.

Borders CEO Mike Edwards calls the change

a seminal part of our overall digital strategy, which we believe positions Borders to compete effectively in the eReading market without a significant investment on the part of Borders.

Note: Those quotes are taken out of context, but I personally believe that the context is 'spin,' calling the change an "expanded partnership with Kobo." You might want to read the linked press release yourself and make your own decision on whether my extraction was fair or not.

[Mira]

What's costing them more is buying the stuff (books, etc.) that they're selling. Why, I don't know.

The bonus plan was approved by the bankruptcy court, but bonuses will only be paid after Borders successfully emerges from bankruptcy, or is bought out by another party who will continue to operate Borders. It's only $6.6 million anyway, which is less than what Borders lost in one week in April.

So, they are giving executives bonuses in the amount that they lose in one week? How much do they lose in a month?

I'm sorry, but I say replace the lot of them. They'd only have to pay me 3 million, which is half of what they lose in a week, and I'll come and get their behinds out of trouble.

But I digress.

The Kobo stuff is interesting. Is Kobo Borders e-reader?

What impressed me is the concept of reader tracking and rewarding readers for reading things. Well, I have ambivalent feelings about it, but for crying out loud, it's about time someone started to exploit the incredible (albeit manipulative and bordering on evil) opportunity to manipulate readers. It's called market testing, and marketing, and if other e-readers dont pick it up, Kobo will have a definite edge.

[Doug Pardee]

Borders holds a minority stake in Kobo and sells the Kobo e-reader (they also sell other brands). Kobo runs the Borders e-book store, and the announcement is basically that the Borders name will be removed from that store at the end of the month.

As for tracking readers, Amazon's been doing it for years. The Kindle reports back to the mother ship on a regular basis, telling Amazon what has been read (title and page numbers), when it was read, and — at least for the 3G version — the general geographical location of the Kindle (probably determined from cell tower locations). Many Kindle owners love Amazon's WhisperSync feature, which sends their notes, bookmarks, etc., to Amazon to be stored. Amazon doesn't say what they do with all that information, but it's not unreasonable to assume that the choice of ads being shown on the new "Kindle with ads" models is based on customer purchase and reading history.

This is one of the big reasons I chose not to buy a Kindle, even though I'm an Amazon Prime customer. I prefer to keep my reading habits relatively private.

[Doug Pardee]

This is really bad news for Borders.

They filed for bankruptcy on February 16th, and the court gave them four months to come up with a plan for getting out of bankruptcy. That deadline is June 16th, about two weeks away.

On May 19th, Borders asked the bankruptcy court for another four months to come up with a plan for surviving (whether by exiting bankruptcy or by being sold). Now the Creditors Committee has objected to the extension, and they claim that Borders doesn't even have a draft plan.

The hearing on the motion is scheduled for this Thursday, June 2nd. If the court turns Borders' motion down, Borders will be in default of its Debtor In Possession conditions, and the court and the creditors could take control of the remaining assets. If that happens, my guess is that Borders will almost immediately cease operation, all assets will be sold off, and the court will decide who gets how much of the proceeds.

The end might be very near.

[Mira]

I appreciate that you post this information, Doug! I find it really interesting.

I guess I find two things confusing here. First, why is it taking Borders so long to come up with a plan? And two, why wouldn't the Court give Borders an extension? Seems like an additional four months isn't really that much to ask for.

On the other hand, and this is going to sound really heartless, I'm not heartess, just realistic. It is sort of delaying the inevitable. We're in the middle of a technology change, so eventually all paper books stores will lose enough business that they'll have to close.

Still, it seems early. I wonder what the imact of Borders closing will be? How might it affect Barnes and Noble?

[Doug Pardee]

why wouldn't the Court give Borders an extension?

Normally, it would. This kind of motion is routine in bankruptcy cases, and the motion is usually rubber-stamped by the judge.

But Borders' bankruptcy hasn't been routine. Even with the protection of Chapter 11, even with the closing of their under-performing stores, Borders continues to lose money on operations (meaning simple sales of product, ignoring non-sales-related overhead). Furthermore, their operating losses are getting worse rather than better as time goes on, which is a Really Bad Sign. As I noted earlier, Borders' "cost of goods sold" alone soaked up over 95% of their entire income in April, without even considering the fixed operating expenses like store leases, utilities, and store personnel.

Throw in the statements by Borders execs that they're "fine-tuning" their operations, and the overall picture is one of being on a rocket sled to insolvency-land. Borders should be thinking about making drastic changes to the way they do business, not fine-tuning.

Also, there's no indication that Borders has even started working on the plan.

The Creditors Committee has objected to the extension, and there's a significant chance that the judge will side with them. If that happens, and if GE Capital pulls its DIP credit line, it's all over except the paperwork.

We should find out tomorrow.

[Doug Pardee]

I wonder what the imact of Borders closing will be? How might it affect Barnes and Noble?

The crystal ball is always hazy on these things, but we can assume that short-term, B&N will be hurt by the Going-Out-Of-Business sale at Borders. This was a concern B&N had when Borders originally filed for bankruptcy and announced that they were closing 200 stores; as a result, B&N canceled its usual stock dividend last quarter in order to keep the cash in reserve. Having the rest of the Borders stores going out of business could be painful.

[People are funny. The GooB prices were pretty much the same as the everyday prices at Borders and B&N, but consumers were jumping all over the sales.]

Longer-term, the reduction in competition will mean more traffic for B&N. B&N has also indicated interest in about 10 of the Borders store locations.

But the whole situation is a milky swirl because of Liberty Media's current offer to buy the majority of B&N stock, presumably with the intent to take B&N private. There have been rumors that Liberty Media has also looked at buying Borders, although personally I can't imagine they'd want the whole thing — I don't see the value, and Liberty Media is basically a television/cable company with no prior interest in having warehouses and stores. Buying up Borders' share in Kobo, especially if they can combine it with B&N's e-book operations, could be interesting, though.

Time will tell. There's not really much we consumers and authors can do except to adapt to whatever happens.

[Mira]

Wow, Doug, you are really informative and on top of this information! Color me really impressed, and thanks for taking the time to explain things....

I get that the Court may be pissed at Borders, but is that really enough for them to trash it? Maybe they should send in someone to help Borders out.

(I'm available, and I'd do a bang-up job, although, I think Doug, you might do an even better one. First thing I'd do if I were hired is hire you).

Again, though, I truly believe that bookstores are (sadly) on their way out for the most part. I could be wrong, but that's the way I see the technology change happening. So, I really feel for all those folks who might be out of a job in this economy, but I'm aware that this is probably an inevitablity at some point...

[Doug Pardee]

Judge Martin Glenn approved Borders' motion for another 120 days to come up with a plan for getting out of bankruptcy. So Borders is back to business as usual.

Publishers Weekly goes on to report that according to Borders' attorney, "there are multiple buyers for the retailer, and Borders could file a plan for selling the company in the next two to four weeks, although he did not indicate if there were buyers for the entire company. He added that Borders is still working on drafting a standalone reorganization plan."

[Mira]

Cool - I'm glad people still have their jobs!

I don't always understand the ins and outs of the business world - it's so complex - but it's very interesting to hear about it!

Be very interesting to see what happens.

[Doug Pardee]

Today's news: in an 8-K filing to the SEC, Borders stated:

On June 2, 2011, Michele M. Cloutier resigned as Executive Vice President and Chief Merchandising Officer of Borders Group, Inc.

Publishers Weekly says:

Cloutier was one of five executives covered by Borders's key incentive bonus plan and stood to earn $100,000 if Borders hit certain target dates in either emerging from bankruptcy or arranging the sale of the retailer.

Internet Retailer says that Ms. Cloutier was brought into Borders ten months ago to "oversee merchandising, marketing and supply chain, playing an integral role in helping Borders redefine its brand and drive a turnaround of the company."

I don't know what to make of this development, except that it makes me wonder about Borders' claims that it thinks it's just a few weeks from wrapping up a sale of the company.

[Side note to Publishers Weekly: "Borders's?" Really? If you consider Borders as a corporation to be plural, see CMoS 16e 7.16; if you consider it singular (the usual case in the US), see CMoS 16e 7.19. Either way, there's no "s" after the apostrophe.]

[Mira]

So, the person in charge of the reorganization quit?

Wow. That does not build confidence.

I love how informative you are, Doug. Thank you!