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Borders Wants Normal Trade Terms–and Isn’t Getting Them

March 13, 2011
By Michael Cader

In a conference call with vendors on Friday, Borders executives reiterated the Pollyannish view that they have held since their “not a liquidity crisis” days, asking major suppliers to treat them like a normal business even though they are not.

The company confirmed what’s been part of the plan since their bankruptcy filing: “the decision will be made early next week” (now this week) on how many additional stores to close. They are allowed a maximum of 75 additional store liquidations (though a Borders spokeswoman indicated that number is closer to 20 to 25 stores at the moment) and are choosing from almost 140 stores which “have been identified as on the bubble” financially. As of their bankruptcy filing they had 485 superstores, 200 of which are being liquidated now. Simple math tells you that Borders retains only 145 superstores which they believe are clearly profitable.

CEO Mike Edwards inadvertently indicated that at least some smaller format stores will eventually close, too. Up until now they’ve said they had no plans to close more of those stores; now, Edwards says, “we do anticipate a major closure program.”

Edwards indicated that the top 20 vendors are shipping them merchandise, but mostly “cash on shipment,” even as “smaller vendors are generally shipping to us on normalized trade terms.” He pleaded that “normalized trade terms will be critical to the company’s success and we hope that you’ll work with us to restore those terms.” Edwards also said “it is also critical that we begin and are able to return books consistent with our ordinary business practices”–except for many vendors, those ordinary practices resulted in 50 percent returns in 2010, followed by non-payment of bills, so don’t hold your breath there either.

Edwards told the WSJ Borders hopes to present a formal operating plan in early April, with the “ultimate goal” of exiting bankruptcy in August or September. “You’ve got a window, and you have to move decisively,” he said. But last week’s filing from the creditors committee was a pretty clear answer on that score: practically speaking, Borders needs an “exit plan” by June.

For those who can’t wait patiently for that plan, Edwards provided a preview of the exciting new developments in store: a “refreshed merchandise strategy” (fewer empty shelves), a “new commitment to ebooks” and an “enhanced store layout.” Part of that new ebook commitment, Edwards told the WSJ, will see Kobo sharing some of the proceeds of every Kobo ebook sold in the US, with Borders then putting “all of its online and in-store marketing and promotional muscle” behind the brand. But in the next breath, Edwards says Borders will continue to sell other e-readers, presumably the same low-grade brands that helped relegate the company to also-ran status in the digital marketplace.

To get fewer empty shelves, Edwards envisions a smaller books footprint in the superstores, with 15,000 square feet devoted to new books (or 60 percent of the space) and possibly adding used books to the merchandise mix.

The one glimmer of potentially good news in the call was cfo Scott Henry’s contention that “sales in the go-forward stores have exceeded our expectations” (perhaps with traffic boosted by people expecting liquidation prices).

Also on Friday, Borders responded to a number of objections lodged by the unsecured creditors committee on the DIP financing terms and by landlords less than thrilled with the idea of lease rejections. Although Borders says the committee’s “heart is in the right place” in wanting lower fees, reduced covenants and more money given to unsecured creditors, Borders argues the terms they received from GA Capital are “the best terms…currently available in the marketplace.” They were turned down by 39 other, unnamed lenders. Without other options, Borders essentially had to stop trying to get more concessions from GA Capital lest they “lose critical post-petition financing and the ability to reorganize.” Borders added, “if the committee has identified a more reasonable alternative to the DIP loan, they have not yet shared it.”

Though landlords have objected to Borders’ desire to extend the deadline for the court to accept or reject lease objections, Borders says such criticisms are misguided in light of the tight conditions of the DIP facility.  In other words, without a deadline extension, Borders “will be required to liquidate all inventory in all stores because they are not prepared to assume all of the leases.” If the deadlines are missed, or the court rejects the lease extension motion, Borders risks “defaulting on the DIP and losing the ability to borrow thereunder, which also will force a liquidation.”

The DIP facility did extend the deadline to send bid packages to potential liquidators from March 3 to tomorrow, the same day as the scheduled Omnibus hearing.

Filed Under: Bookstores, Finance, Free

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