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Will it be a merry Christmas for Borders, Barnes & Noble?


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#1 johnnyhusker82

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Posted 19 December 2010 - 09:44 AM

Holiday shopping season seen as decisive to survival of bookstore chains

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Final chapter? Borders launched its e-bookstore in July, eight months behind Barnes & Noble and it has no plans to make its own e-reader. Even its online sales which include e-books fell last quarter.
By Phil Wahba
Reuters

NEW YORK The two largest U.S. bookstore chains have offered up a compelling cliffhanger this holiday season that will seal the fate of brick-and-mortar bookselling.

In the latest chapter, Barnes & Noble Inc. has put itself up for sale, while Borders Group Inc. has put its hand out to lenders in hopes of avoiding a cash shortfall early next year.

Both chains are trying to show they can replace the sales of books lost forever as more book buyers head online or opt for digital books.

Borders is in worse shape, bleeding sales and closing hundreds of stores. Last week it reported yet another double-digit percentage decline in same-store sales and said it could violate terms of its debt agreements in the first months of 2011 if it cannot refinance.

"They're just trying to stay alive at this point," said Michael Souers, a Standard & Poor's retail analyst. "Hopefully, their numbers can improve enough to get someone to want to lend them more money."

Last week, Borders' second-largest shareholder, William Ackman's Pershing Square Capital Management, offered to fund a merger of Borders and Barnes & Noble. The idea was dismissed by analysts because of how much the retailers' store locations overlap.

"If one wanted to go after the other's real estate, they could just wait until bankruptcy and pick them off on the cheap," said Morningstar analyst Pete Wahlstrom, noting that Borders would be the far likelier Chapter 11 candidate.

A Borders spokeswoman declined to comment on whether the company was considering a bankruptcy filing.

Larger rival Barnes & Noble is on better footing thanks to its popular Nook e-readers and rising e-book sales. But physical books a shriveling business still make up the lion's share of its revenue.

The company put itself up for sale in August and is under the gun to show that the Nook is generating e-book sales quickly enough to warrant a high price for the company.

"Holiday e-reader sales this year will show where you have a clear leader," said Wahlstrom. Five suitors are eyeing Barnes & Noble, a source has told Reuters.

E-books now make up about 5 percent of all book sales. The figure is expected to triple within five years. E-reader devices don't offer great margins, but they do spur e-book sales.

Investors are skeptical about both retailers' long-term prospects. Borders shares trade around $1.18, down nearly two-thirds since April and a fraction of their all-time high of $41.75 in 1998. Barnes & Noble shares have fallen 22 percent this year, to about $14.44, a far cry from a peak of $48.41 in 2006.

Barnes & Noble and Borders together accounted for about a quarter of U.S. physical book sales last year, according to a Goldman Sachs study.

But analysts say one thing is clear: There is no need for all 1,200 superstores the companies operate Barnes & Noble has 720 and Borders has about 500 given what is seen as a permanent shift in book-buyer habits.

"If I popped you in the middle of a Borders or Barnes & Noble, you might not know what store you're in. They're basically the same store," said Mark Freiman, a senior retail consultant at Focus Management Group, who has spoken to Borders management about how to turn around the business.

Borders' has mostly targeted its Waldenbooks chain for store closings; Barnes & Noble has insisted it has no plans to close many of its superstores.

The difference in the companies' fortunes was plain to see last weekend in Santa Barbara, Calif. The Borders store there was holding a going-out-of-business sale, even selling the kitchen sink used in its cafe. Across an intersection, a Barnes & Noble teemed with shoppers.

Borders and Barnes & Noble both waited too long to react to Amazon and the emergence of e-books, observers said. Nook was launched last year, two years after Amazon's Kindle debuted. "There's no excuse," Freiman said.

Borders finally launched its own e-bookstore in July, eight months behind Barnes & Noble. It has no plans to make its own e-reader. Even its online sales which include e-books fell last quarter.

Borders said last week it would soon introduce toy sections with a deeper selection of educational toys in test stores.

"They've been playing catch-up and follow-the-leader for quite some time," Souers said.
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