Blockbuster's loss widens in Q3

PHYSICAL: Same-store sales fall 14%, while financing costs rise

By Danny King -- Video Business, 11/12/2009

NOV. 12 | PHYSICAL: Blockbuster said today that its third-quarter loss widened from a year earlier, as the largest U.S. movie-rental chain closed stores, saw a 14% drop in same-store sales and conserved cash by cutting advertising costs in preparation to refinance debt. The company added that it expects to reverse its same-store sales decline by boosting in-store inventory with cash from the newly refinanced debt agreement and will put more emphasis on boosting videogame sales.

The company’s net loss for the quarter ended Oct. 4 widened to $114.1 million, or 60¢ a share, from $17.8 million, or 11¢, a year earlier, as revenue dropped 21% to $910.5 million, Blockbuster said in a statement today. The company was expected to lose 11¢ a share on $1.01 billion in revenue, the average analyst estimate in a Thomson Reuters survey.

Blockbuster, which had been cutting advertising and keeping DVD inventory levels steady to comply with a $250 million refinancing agreement reached mid-year, secured a $675 million debt agreement that gives the chain more cash to invest in its Blockbuster Express kiosks and digital offerings. The company this quarter will also boost in-store DVD inventory on popular titles by more than 20% from the third quarter, Blockbuster Chief Executive Officer Jim Keyes said on a conference call with analysts today.

"We temporarily changed our approach" to comply with the earlier debt agreement, Keyes said. "I can assure you we're glad that phase is over. We've now returned our focus to transforming the core business."

Blockbuster also said in September that it would close as many as 960 stores by the end of next year and convert as many as an additional 300 to outlet-type stores as it looks to close unprofitable units and cut its debt. The company has shuttered 216 stores this year and might close as many as another 115 by the end of the year. Its approximately 6,800 worldwide store count marks a 1,000-store drop from two years ago.

Blockbuster has been looking to counter falling store sales by widening both its video-on-demand availability and self-service kiosk presence. Last month, Blockbuster started making its on-demand titles playable through about 30 Samsung products such as high-definition televisions and Blu-ray Disc players as well as TiVo digital video recorders while selling those electronic components at thousands of stores in agreements reached with the companies earlier in the year.

Blockbuster late last year started selling a set-top box that plays digital downloads from Blockbuster.com directly on consumers’ TV sets. The company integrated what had been known as its Movielink digital download service into Blockbuster’s Web site in July.

Additionally, as part of a licensing agreement with Blockbuster that began last year in an effort to challenge movie-rental kiosk leader Redbox, ATM-making giant NCR has deployed about 1,500 Blockbuster Express self-service kiosks, up from about 700 in early October, with plans for about 2,500 by the end of the year and as many as 10,000 by the middle of 2010. Coinstar’s Redbox division had more than 20,000 machines in operation at the end of the third quarter.

Still, Keyes, who said kiosk growth will help distribution by giving the company a hub-and-spoke system with its stores, warned against investor expectations that either service would soon have a substantial impact on earnings. With NCR only paying Blockbuster a commission on kiosk sales after a certain threshold is met, Blockbuster Express won't have a "material" effect on the company's revenue until at least the second half of 2010, said Blockbuster Chief Financial Officer Thomas Casey on today's call.

In an attempt to boost videogame sales, Blockbuster will also have made improvements to about 1,700 stores by the end of the year, up from 600 store facelifts in 2008, though the $10,000 to $20,000 upgrades per store are less expansive than a year ago, Keyes said. With much of the improvements involving new flat-screen displays, Blockbuster is looking to make its stores more of an entertainment and gaming center as much of its rentals get dispersed to the kiosks. The company, which started testing a games-by-mail service the Cleveland area in May, is also testing the service in Seattle and will roll out the service market by market starting early next year.

"Games continue to represent the biggest in-store opportunity for growth," Keyes said today.