Blockbuster looks to boost sell-through as losses grow

Online subs fall by 500,000

By Ned Randolph -- Video Business, 11/1/2007

NOV. 1 | Blockbuster laid out some details of its plan to improve store profitability—including a focus on consumer sales—as it reported a wider third-quarter loss Thursday.

The rental chain reported a net loss of $35 million from ongoing operations, compared to a loss of $24.7 million in the same period last year, as it struggled to reign in expenses by terminating store leases, limiting executive pay and eliminating "unprofitable subscribers" from its online Total Access program. Revenue dropped 5.7% on the quarter to $1.24 billion.

"We believe the actions we have taken over the last quarter have better positioned Blockbuster for the future," said Jim Keyes, chairman and CEO. "Going forward, we are focused on protecting our core rental business, developing new retail opportunities and becoming the preferred provider of digital entertainment. To this end, we have launched a series of initiatives centered around product availability and increased emphasis on our retail business."

Same-store rental revenue in the U.S. increased 2.3% in the quarter and revenue from the online rental service rose $72.2 million year-over-year. Blockbuster’s online subscribers, meanwhile, fell from 3.6 million in the second quarter to 3.1 million by the end of the third quarter, which the company attributed to removing unprofitable subs from its rolls.

Keyes said in a conference call with analysts that the company will increase store profitability by creating a "merchant culture" focusing on DVD sales, snacks, music and posters. Blockbuster also plans to sell more movies to its customer base and partner with studios on theatrical releases.

The company said  Blockbuster sold 200,000 Transformers DVDs in the title's first week on shelves last month. It next plans a big sales push for Nov. 13 release Shrek the Third. Keyes said 80% of the chain’s business on the title will be sell-through, with only 20% from rental.

"This year we will be out there more pro-actively retailing Shrek 3 and hoping that customers be willing to pay a premium [over Wal-Mart and Best Buy] for that title,” he said.

Blockbuster plans to create new store "prototypes," emphasizing gaming, an interactive kids section, and testing of video devices. Remodeling of stores is scheduled to begin in January, Keyes said.

He also stressed moving toward a digital footprint through the summer acquisition of online download service Movielink.

"It allows us to offer customers access of new releases via the Internet. We plan to fully integrate Movielink into Blockbuster.com, which will be completed in the first quarter of next year," Keyes said.

Blockbuster purchased Movielink for $6.6 million on Aug. 6. In a filing with regulators last week, Blockbuster reported that Movielink lost $10.18 million in the first half of 2007.

Third-quarter net losses included losses from lease terminations and severance of $9.6 million. The company said it has already implemented a plan to lower yearly overhead costs by about $45 million through job cuts and the elimination of "operational redundancies." Blockbuster laid off 145 employees, or about 11% of its corporate headquarters staff, in September.

The company also sold or closed 526 company-operated stores worldwide, which contributed to falling revenue.

Blockbuster also limited the terms of, and cut ad spending for, its Total Access subscription plan, which "significantly reduced the number of unprofitable Blockbuster Total Access subscribers," the company said.

The company said it plans to report total membership numbers in the future rather than just its online subscriber count.

Blockbuster's executive team has scheduled a two-hour meeting with analysts in New York on Nov. 8 to lay out its future strategy.