Borders Liquidators Race Clock, Squeeze Cash From 200 Stores

At the Borders Group Inc. store on Broadway near Wall Street, box sets of Stieg Larsson’s best-selling “Millennium” trilogy, including the “The Girl With the Dragon Tattoo,” sat on a table near the door last week on sale for $69.39 -- a liquidation markdown of 30 percent.

The set costs half as much on Amazon.com Inc. (AMZN)’s website, where it was listed for $34.58 -- with free shipping. Amazon’s Kindle e-book editions were even less, priced at $27.97. At Wal-Mart Stores Inc. (WMT)’s website, the three books sold for $34.96.

Borders, the second-largest U.S. bookstore chain after Barnes & Noble Inc. (BKS), filed for bankruptcy last month after management shuffles, firings and debt restructuring failed to combat falling book sales and competition from Amazon and Wal-Mart. It pledged to shutter about a third of its stores.

Liquidators who agreed to pay at least $155 million for the right to sell the contents of those locations, however, aren’t looking to compete with the chain’s rivals. While slashing prices to convert every book, DVD and CD into cash before their contract expires April 30, the art of liquidation requires they keep prices high for popular items. Once in the store, buyers may want to get all their shopping done and spend more, said Scott Carpenter of the liquidation firm Great American Group Inc. (GAMR)

“Eventually, prices will get lower if it doesn’t sell,” said Carpenter, director of Great American’s operations for retail.

Hilco the Liquidator

The liquidation of more than 200 of Ann Arbor, Michigan-based Borders’s stores is being coordinated by Hilco Merchant Resources LLC. The Northbrook, Illinois-based firm, a retail liquidation specialist, is a unit of Hilco Trading LLC, whose businesses include valuation appraisals, private equity investing, merger advisories, real estate services and debt placements, Richard Kaye, the parent company’s executive vice president, said in an e-mail.

A nine-hour auction last month drew 38 bids for the right to liquidate the stores. Hilco took an equal stake in the winning bid with Gordon Brothers Group LLC, SB Capital Group and Tiger Capital Group LLC.

Under the contract, they assumed expenses, legal costs and tasks including shoveling snow, emptying trash and managing store employees. They agreed to pay Borders 85.75 percent of the “cost value” of all merchandise, according to court papers. The estimated cost value is between $180.6 million and $204 million.

The liquidators must sell as much as possible before their contract expires in order to maximize profit. Afterwards, their options are limited: They can sell stock to a non-retail customer, hang onto it and attempt to sell it later when liquidating other stores, or abandon it. They can’t sell to wholesalers or bulk purchasers who may return Borders stock to publishers, and thus Borders’s competitors.

$175 Million

David Friedman, a lawyer for Borders, said in U.S. Bankruptcy Court in Manhattan Feb. 17 that the store closings would bring in about $175 million for the chain’s creditors.

“It’s a pretty aggressive marking-down, and volumes and traffic look pretty high,” Peter Wahlstrom, an analyst at Morningstar Investment Services, said of the Hilco group’s liquidation. Wahlstrom specializes in Barnes & Noble.

Carpenter of Woodland Hills, California-based Great American said the price at auction for liquidating the stores rose too high for his firm to take part.

“We didn’t think you could achieve those values and make a profit,” he said. Carpenter said Great American liquidated video-rental chain Movie Gallery Inc. last year, beating out Hilco and Boston-based Gordon Brothers for the contract.

Complex Goal

The goal of liquidators is more complex than that of a financially healthy retail outlet, he said. Competitive data on an item, such as what Seattle-based Amazon or Bentonville, Arkansas-based Wal-Mart are charging, isn’t as important.

Hilco’s Kaye and Mary Davis, a spokeswoman for Borders, declined to comment on the liquidation’s results to date.

Hilco and Gordon have worked together on previous retail liquidations, including Sharper Image Corp. and Linens ‘N Things Inc., both of which met their recovery plans, Kaye said.

Store closings help liquidators move merchandise because shoppers know they risk missing a bargain if they wait too long.

Rob Richardson of Brooklyn is one of those shoppers.

“I feel like a vulture over a carcass, looking for a cheap book,” said Richardson, as he perused the remaining stock at the Broadway Borders last week in lower Manhattan. He said he was going to buy Niall Ferguson’s “High Financier: The Lives and Time of Siegmund Warburg” for 40 percent off.

Scratched Oak Tables

Books aren’t the only items on sale at the store. Shelves were tagged for about $80, and a five-tier Ghirardelli Chocolate Co. stand was priced at $100 in the café. Scratched oak tables went for $75 each.

Liquidators can also promote sales in a way a chain’s owner wouldn’t.

“Borders has a color of red that is their red. It’s hard for them to say: ‘I’m going to put this loud ugly yellow on the sign,’” Carpenter said. If “you see the loud, garish sign, that’s to let the customer know there is something very different going on.”

At the Broadway Borders, yellow and red signs attached to the store’s black marble pillars said in capital letters “Store Closing” and “Nothing Held Back.”

Prices drop over the course of a sale based on “discount cadences” devised by the liquidator, Carpenter said. Relying on models, liquidators can see when and by how much to mark down merchandise in different categories.

Michael Hammer’s “Faster, Cheaper, Better,” a 2010 management book, was being sold 20 percent off on March 2, and was 30 percent off on March 15. On Amazon, it was marked down 43 percent as of March 22.

Empty Third Floor

By March 21, the third floor of the Broadway store was largely bare, with ropes across empty aisles. The remaining art books were shelved with cookbooks, and CDs and DVDs were spilling off racks near the checkout counter.

Borders said that, in addition to closing more than 200 stores, the bankrupt retailer will cut its most expensive leases, expand customer reward programs and add other products to its lineup of books. On March 19, the company slotted another 25 stores for closing.

The chain said it will use the money from the liquidators to refurbish its 442 remaining stores and capitalize on the shifting habits of shoppers.

One of them, Tantaniqua Potts, 34, was in the Broadway store buying three CDs last week. Though she said liquidation sale “deals could be better,” Potts added that she plans to buy Borders’ Kobo e-reader, marked down to $69.99 from $139.99.

Building E-Book Business

Borders, whose market capitalization has shrunk by more than $3 billion since 1998, said one of the changes that drove it into Chapter 11 -- the rise of digital formats -- now offers it a chance to use restructuring to build its e-book business.

Book sales in the U.S. peaked at $16.8 billion in 2005 and totaled $16.5 billion last year, Wahlstrom said, citing U.S. Census data. Books were still a $23.9 billion-a-year industry in 2009, including textbooks and e-books, he said.

E-book sales doubled to $441.3 million last year, accounting for 8.3 percent of revenue from trade books, according to the American Association of Publishers.

Michael Stone, co-founder of the Beanstalk Group, a company that advises on brand licensing to clients including Procter & Gamble Co. and Black & Decker Corp., said Borders missed the e-commerce revolution.

“I’m not sure they can compete with Amazon, Barnes & Noble, and Wal-Mart,” Stone said. “Amazon is a now a complete powerhouse in this category.”

Eddie Edwards, 56, a former lawyer from Ohio, walked through the Broadway store with an armful of finance books, including “The Futures” and “The Great American Bank Robbery.” Still, he said, good deals were hard to come by.

“Prices are cheaper on Amazon,” he said.

Borders fell 17 cents today to close at 26 cents a share in over the counter trading. Barnes & Noble rose 1 cent to $9.72 in New York Stock Exchange composite trading.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in U.S. Bankruptcy Court in New York at tkary@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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