• by Sarah Mahoney  @mahoney_sarah, March 21, 2008

Between the tight credit markets and the downbeat retailing climate, Borders is feeling all boxed in. The Ann Arbor, Mich.-based company suspended its dividend and says it's looking for a buyer, announcing the launch of a "strategic alternative review process."

In addition to hiring J.P. Morgan Securities Inc. and Merrill Lynch & Co. as advisors, it says it also got an injection of $42.5 million from Pershing Square Capital.

"This will be a challenging year for retailers due to continued uncertainty in the economic environment," the company says, adding that without the funds from Pershing Square, "liquidity issues may otherwise have arisen in the next few months."

The company--the second-largest bookstore chain--also reported fiscal fourth-quarter earnings of $84.7 million, down from $87.7 million. Same-store sales increased by 2.1% for the quarter, which the company says is the third consecutive quarter of positive same-store sales at domestic Borders superstores. Book sales were relatively strong, with a 3.2% same-store sales increase for the quarter, while music sales tumbled 14.2%. The company says it is continuing to cut its music inventory and devote that space to better-selling merchandise.

Still, for the year, operating income at its superstores plunged from $111.3 million in 2006 to $56.9 million in 2007, due to "higher than expected DVD shrink/cafe waste expenses of $19.9 million and increased promotional spending of $23.8 million in 2007."

At its Waldenbooks segment, same-store sales gained 1.2% in the fourth quarter and by 2.2% for the full year--while total sales fell 17% in the quarter to $228.3 million, and 14.1% for the year to $562.8 million. So far, the company has shut down 75 underperforming Waldenbooks stores, and it says it will continue to aggressively close locations that aren't performing well.

Meanwhile, rival Barnes & Noble, Inc., the world's largest bookseller, also turned in lower earnings. Net earnings fell to $115 million in its fiscal fourth quarter, compared with $135.8 million a year ago. Comparable-store sales decreased 0.5% for the quarter and increased 1.8% for the year. B&N says it expects first-quarter comparable store sales to be slightly negative, while full-year comparable-store sales are expected to be slightly positive.

Book clubs are also struggling, and, earlier this week, Bertelsmann AG announced plans to dump its U.S. book, music and DVD clubs, where membership is reported to have fallen to 13 million customers from 16 million three years ago.

Some think Amazon is emerging as a stronger player than ever, expanding its horizons with Kindle, its book-reading product, and its recent acquisition of Audible, an audio bookseller. Deutsche Bank is one, saying in a new report: "Despite the increasing malaise in the general retailing and e-commerce industries, we think that services such as Amazon Prime, super-saver shipping, as well as initiatives such as third-party, create for defensibility amidst a slowing industry landscape.

"Over the past year, Amazon Prime has helped to shift consumer behavior, fuel cross-category shopping and consolidate wallet share into the hands of Amazon.com. This strategy has helped to accelerate user growth, purchase frequency and unit growth at the company in the past year, while the e-commerce market has deteriorated."

And meanwhile, there is a continued spark in the independent bookstore segment, the group of small retailers most threatened by international book chains. The American Booksellers Association says 115 new bookstores opened for business last year, the third year in a row that the number of bookstore openings topped 100.

And a spokesperson for the organization says that independents have held their market share of about 10% of gross books sales.