Blockbuster Q2 loss narrows 12%

AUG. 13 | PHYSICAL:U.S. same-store sales fall 17.8% on inventory, games

By Danny King -- Video Business, 8/13/2009

AUG. 13 | PHYSICAL: Blockbuster trimmed its fiscal 2009 second-quarter loss by 12% from a year earlier, as the largest U.S. movie-rental chain cut inventory and advertising costs to comply with a $250 million refinancing agreement it completed in May. U.S. same-store sales fell 17.8% on both the lower inventory and a drop in videogame sales. The company, which cut its 2009 profit forecast by about 11%, also backed Warner Home Video's decision to push a later DVD release window for vending kiosks even as it expands its partnership with NCR to almost 10,000 Blockbuster Express kiosks over the next year.

“We temporarily changed our strategy to manage the business for cash, not growth,” said Jim Keyes, CEO of Blockbuster, in a conference call with analysts today. “We must be realistically conservative about the remainder of this year.”

Blockbuster’s net loss for the quarter ended July 5 narrowed to $36.9 million, or 21¢ a share, from a loss of $41.9 million, or 23¢, a year earlier, the company said in a statement today. Sales dropped 22% to $1.02 billion. Blockbuster was expected to lose 12¢ a share on sales of $1.12 billion, the average analyst estimate in a Thomson Reuters survey.

The company was able to narrow its loss by cutting costs quickly enough to account for the drop in sales. The company’s cost of sales was 45% of revenue, down from 50% a year ago. Strategies such as the testing of one-day rental pricing at some stores were curtailed because the lower rates cut profit, Keyes said. Still, Blockbuster cut its 2009 profit forecast, saying that earnings, excluding certain items, would be about $280 million, down from its May forecast of about $315 million. Shares were down about 15% in after-hours trading at 7:45 p.m. Eastern time.

Blockbuster said in March that it would try to reduce costs for at least the early part of this year on items such as retail inventory and capital expenditures. Such cost-cutting measures were to be part of the retailer’s effort to cut its debt by about $100 million to comply with the new $250 million refinancing agreement, which extends a line of credit more than a year past its previous due date of August 2009 and was finalized May 11.

Between its positive cash flow, sales of some of its overseas assets, renegotiation of its store leases and closures of underperforming stores, the company is trying to cut its debt by about $400 million within the next two years. Blockbuster Chief Financial Officer Tom Casey said today that the company continues talks with debt- and equity-holders over potential ways to cut its cost of capital, while Keyes spoke of an "anticipated sale of an international asset" without providing further detail.

Blockbuster will accelerate the closure of its standard 5,000-square-foot stores and open more smaller, 2,500-square-foot units as it develops its Blockbuster Express kiosks with partner and ATM-making giant NCR in its effort to challenge Coinstar's Redbox division, the largest U.S. kiosk operator. NCR will deploy 500 Blockbuster Express kiosks by the end of the month, 2,500 units by the end of the year and as many as 9,500 within the next 12 months, Keyes said today. Blockbuster has about 7,100 stores worldwide, down from about 7,600 a year ago.

Still, Keyes supported Warner Home Video's decision today to follow the lead of Universal Studios Home Entertainment and 20th Century Fox Home Entertainment by enforcing a 28-day delay on new release delivery to rental kiosks because the window helps Blockbuster's brick-and-mortar stores.

"We're not sure it's in our best interests to have day and date" for kiosks, Keyes said, adding that the $1-a-day rental rate by Redbox "is not a sustainable industry model."

Blockbuster’s results reflect a U.S. home entertainment market in which consumers cut spending for the first half of the year by 3.9% from a year earlier, according to DEG: The Digital Entertainment Group. DVD rental was up 6% overall, however that represents a slight 2% decline in bricks-and-mortar and online channels more than offset by more than 150% growth in kiosk rentals, according to Rentrak.

Additionally, videogame sales have dropped as more gamers look to save money by playing free online games instead of buying new titles. Blockbuster's same-store retail sales plunged 38% from a year earlier largely on declining sales of videogame hardware and software.