Borders release of its third-quarter results last Thursday confirmed the trend among the nation's largest bookstore chains—falling sales from bricks-and-mortar stores and less space devoted to books. While total sales for the three major bookstore chains rose 34.6%, the gain was due to Barnes & Noble's acquisition of Barnes & Noble College Booksellers last September. Excluding B&N college results, revenue from the three chains fell 5.3% in the quarter.

As expected, Borders's results were far worse than either Barnes & Noble or Books-A-Million, as sales at the beleaguered chain suffered from both the closing of 204 stores and, more ominously, a drop of 12.6% in store comp sales that it blamed mainly on weak sales of adult trade titles. The company also revealed that it will not meet its EBITDA projections for the 11 months ended December 31 and that sales have been below projections. Due in part to weak results, the liquidation value of Borders's inventory has been lowered, forcing the company to search for new financing. In its 10-Q filing with the Securities and Exchange Commission, Borders said it is in detailed discussions with potential lenders for financing that could provide enough liquidity through early 2012. If Borders is not successful, however, the company could fall into violation of its credit agreement, creating a possible liquidity shortfall in the first quarter of 2011. Borders has faced potential cash crunches in the past and has always found a willing lender.

Publishers were concerned but not panicked about the Borders performance, even though Borders was carrying $444.9 million in trade payables on its balance sheet at the end of the third quarter. Borders relies heavily on vendor credit to finance its operations, and Borders executives said last week that the chain was "getting plenty of inventory." Publishers are hoping Borders will find additional financing or that some sort of B&N/Borders combination can be arranged. Three days before Borders released its third-quarter results, one of the chain's largest shareholders, Bill Ackman, head of Pershing Square Capital Management, announced that he was willing to back a $16 per share bid by Borders for Barnes & Noble. While Ackman's actions created headlines and industry buzz, it is highly unlikely that B&N, especially in light of another awful Borders quarter, would approve such a low bid in a move that makes little strategic sense for the stronger bookseller.

Although Ackman and Borders executives talked about the synergies that could be gained from combining B&N and Borders, Borders continues to bleed cash and has no assets to interest B&N. In the third-quarter report, Borders demonstrated, for instance, that it has little to contribute to B&N's digital endeavors. Despite the launch of its e-bookstore this summer, sales through fell 8.6% in the third quarter, which Borders attributed to a reduction in marketing while it redesigned the site to add more products such as used books and textbooks. For the first nine months of the year, revenue was $43.3 million (B& sales in its second fiscal quarter alone were $176 million).

Borders's revival strategy centers around transforming the brand into a retailer with the "right mix" of book and nonbook items, but the strategy—expanding educational toys and games and selling more e-readers—is already being implemented at B&N. Borders has been written off in the past and managed to keep going, but given its poor financial condition and overall industry trends, it is facing its stiffest challenge yet for its survival.

Borders Group Nine-Month Results 2009–2010 ($ in millions)

2009 2010 % Change
Sales $1,785.4 $1,517.0 -15.0%
Other revenue 22.3 13.7 -28.6
Total revenue 1,807.7 1,530.7 -15.3
Comp-store sales -13.7% -10.2%
Net loss 169.3 185.2 NM

Chain Sales, 2009–2010 ($ in millions) Third Quarter

COMPANY 2009 2010 % CHANGE
Barnes & Noble* $1,160.9 $1,905.6 64.3%
Borders Group 571.4 470.9 -17.6
Books-A-Million 110.9 104.8 -5.5
Total 1,843.2 2,481.3 34.6