Big Blue has cash blues

Nixes quarterly dividend, makes credit deals with studios

By Paul Sweeting -- Video Business, 9/2/2005

SEPT. 2 | Blockbuster announced Friday that it won’t pay a shareholder dividend for the third quarter, marking the first time since it went public in 1999 the retailer has skipped the cash payment.

Its board determined that “at this time, it is more important to use the cash … for the business,” the company said.

The news sent shares of Blockbuster down sharply in early trading and renewed focus on the rental giant’s cash flow, which has plummeted since Blockbuster eliminated late fees at the beginning of the year.

Over the past few weeks, the chain has appealed to studio suppliers for extended payment terms as it looks to load up on product for the fourth quarter, according to studio sources. In some cases, such as with Paramount Home Entertainment’s The Longest Yard, specific deals have had to be worked out before the studio would ship the title to Blockbuster. That title has now shipped.

The chain also recently stepped up its revenue sharing with various studios to reduce strain on cash flow.

Big Blue obtained about 70% of its rental DVDs via rev-share in the second quarter, according to a knowledgeable source. That compares to its typical quarterly average of about 50%.

Although studio sources say they are monitoring Blockbuster’s outstanding payables closely, the situation is not considered critical.

“They have the cash, but they have a lot of uses for their cash right now,” independent equity analyst Dennis McAlpine said.

Studio sources said it appeared Blockbuster was trying to conserve as much cash as possible to bolster its fourth-quarter earnings.

“They are not in imminent danger,” a senior studio exec said. “They are just using the situation to manipulate vendors.”

Last month, the chain reported a loss of $57 million for the second quarter and warned investors that the third quarter would be difficult as well. But in comments since then, chairman-CEO John Antioco has vowed Blockbuster will be back in the black in the fourth quarter.

A Blockbuster spokeswoman said skipping the third-quarter dividend would save about $3.6 million.

Still, some suppliers are starting to hedge their bets by insuring their fourth-quarter receivables against possible delays in payment by Blockbuster. Others expressed sympathy for the retailer’s position, however.

“This has happened with Wal-Mart and other accounts,” one supplier said. “I think people are blowing it out of proportion.”

An exec at an independent supplier blamed any problems at Blockbuster on the state of the industry in general.

“We’re very much aware that there is an issue here,” the indie exec said. “I’ve been explaining to the credit department that it’s soft at the box office, soft on the street, soft on sell-through and rental. No one is immune. It’s not just Blockbuster.”

Blockbuster’s cash problems began with its strategic decision to eliminate late fees. The No Late Fees program, aimed at stimulating rental growth, has cost the chain an estimated $400 million in revenue and $250 million to $300 million in operating cash flow this year.

The company claims the move will eventually boost overall rental transactions to where their revenue will eventually exceed what it was before it eliminated the fees. But in the short term, the strategy has taxed Blockbuster’s inventory, requiring deeper buys and further stretching its financial resources.

Earlier this year, the company was forced to negotiate a waiver of certain cash-flow-to-debt ratio covenants in its credit agreement with its banks.

Without those waivers, it would have been in technical default of those covenants in the second quarter.

Additional reporting by Scott Hettrick and Susanne Ault