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Blockbuster Expects Store Closings to Help: Sales Fell in Quarter, but Profit Rose As Chain Continued to Cut Costs

Posted on: Friday, 10 March 2006, 12:00 CST

By Maria Halkias, The Dallas Morning News

Mar. 10--Multiple video-rental stores in every neighborhood will slowly become a thing of the past as battered industry players close stores in 2006.

In releasing fourth-quarter earnings, Blockbuster Inc. chief executive John Antioco said Thursday that he expects those store closings to help his company outperform the industry in 2006.

"There are some markets where people have four or five stores within a couple miles of their homes," said Arvind Bhatia, a Dallas-based analyst at Sterne, Agee & Leach Inc.

"Store closings are going to be driving this business. When you're in an industry in decline, you have to pay attention to your cost structure."

While sales fell, profit rose sixfold in the quarter as Blockbuster took cost-cutting measures to offset revenue losses from the elimination of late fees last year.

Shares of the Dallas-based chain fell 25 cents Thursday to close at $3.62.

Mr. Antioco said Blockbuster "weathered the perfect storm" in 2005. The company also renegotiated its debt and fought an emotional proxy battle while rentals tanked on a mediocre lineup from Hollywood.

"It was a difficult environment, but we grew our online business, eliminated late fees and reduced our cost structure in a way that bodes better for us as we go forward," Mr. Antioco said.

Store closings will help the bottom line this year, he said. "We are beginning to see some competitors closing stores at a more rapid rate than we have in the past."

Blockbuster plans to shutter 100 to 150 stores again this year -- and maybe more "if we can strike the right financial terms" with landlords, Mr. Antioco said.

"Our goal is to drive revenues from these closed stores -- both our own and our competitors -- to other Blockbuster stores and to Blockbuster Online."

Its largest competitor is also facing difficult decisions.

Alabama-based Movie Gallery Inc. said Thursday that it's in talks with lenders to renegotiate its credit agreements. Also, Bear Stearns cut its price target on the stock to $1 from $3.

Shares of the No. 2 U.S. video chain chain fell to a new low of $2.04, down 17 percent Thursday.

Mr. Bhatia, who covers both chains, said he expects Movie Gallery's banks will work with the chain -- but it, too, has to close stores.

Blockbuster will have easier comparisons this year; it saw a $450 million revenue decline in 2005 from the elimination of late fees.

In the fourth quarter, net income increased to $18 million, or 9 cents a share, from $2.8 million, or 2 cents, a year earlier. Sales fell 11 percent to $1.53 billion.

For the full year, Blockbuster had a net loss of $588.1 million, or $3.20 a share. Excluding one-time charges, it posted an adjusted net loss of $52.6 million, or 29 cents a share.

Blockbuster Online ended the year with 1.2 million subscribers, and Mr. Antioco said the company still expects to have 2 million by the end of this year. Online leader Netflix had 4.2 million subscribers at the end of 2005.

Separately, Blockbuster said it would restate results for 2003, 2004 and the first three quarters of 2005 after discussions with the Securities and Exchange Commission on how it accounts for its rental library. The adjustments won't affect previously reported financials, including revenue and net income, the company said.

E-mail mhalkias@dallasnews.com

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Source: The Dallas Morning News

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