Big Blue resolves to shed assets

Posts $491.4M loss, sets small chains for sale

By Paul Sweeting -- Video Business, 11/8/2005

NOV. 8 | As the video rental market continues to slide, Blockbuster Video is stepping up recent cost-cutting measures and selling “non-core” assets in an effort to staunch red ink.

A day after news circulated of its agreement to sell DEJ Prods. to First Look, Blockbuster disclosed Tuesday that it’s considering selling various rental chains. Blockbuster owns the 40-store, Texas-based Movie Trading Co. chain and operates about 70 stores under the Video King and Mr. Movies banners in other U.S. locations.

In an earnings conference call, chairman-CEO John Antioco said those stores would be sold, closed or converted to Blockbuster stores over the next several months. Also on the block is the 40-store game specialty chain Blockbuster acquired last year, Rhino Video Games, along with its Game Station chain in the U.K. and its Xtravision video store subsidiary in Ireland.

Meanwhile, Blockbuster reported a third-quarter loss of $491.4 million. That compared with a profit of $5.2 million in the same period a year earlier.

The red ink included a non-cash charge of $459.1 million to reflect impaired goodwill left over from the retailer’s split-off from former parent Viacom. Excluding that charge and costs of stock-based compensation, the loss for the period was $24.6 million.

Quarter revenue was 1% lower, at $1.39 billion vs. $1.41 billion in the year-earlier period.

Worldwide same-store revenue fell almost 4% in the quarter, including a 3% decline in domestic comparisons.

Same-store rental revenue fell 2.5% worldwide, including a 1% drop at U.S. stores. Blockbuster includes revenue from its online subscription service in its same-store calculations.

The proposed sale of assets is part of a broader strategy by the company to increase its financial flexibility as revenue remains under pressure, Antioco said.

Also Tuesday, the company said it is launching a private placement of convertible preferred stock, which is expected to bring in $100 million. Big Blue also will offer an additional $50 million to its 25 largest shareholders.

The $100 million private placement is related to recent changes in Blockbuster’s main credit agreement, providing the company with a waiver of certain cash flow ratio covenants. Under the renegotiated credit terms, the waivers are contingent on the company raising at least $100 million in new capital, according to the announcement.

Other moves include closing additional stores through attrition, slowing new store openings and cutbacks in overhead spending. The company said it will cut an additional $100 million in expenses in 2006, on top of the $35 million in cutbacks previously announced.

Store closings will occur as leases come up but will not result in a significant net decrease in the total store base, Antioco said.

“Over the past few years, we’ve closed anywhere from 100 to 150 stores annually. Going forward, we may increase that number slightly, and we won’t be opening as many as in the past,” he said. “However, I don’t see that as making a significant change in the overall number. Remember, our goal is to grow our share of the store-based business.”

The company’s Game Rush store-in-store departments also are targeted for cutbacks, with underperforming locations likely to close.

“Our strategy is to focus on two things,” Antioco said. “One is to grow our share of the store-based rental industry, which we believe will undergo considerable consolidation. Second is building our online business.”

But Blockbuster Online posted no net increase in subscribers in the third quarter, as the company drastically cut back on marketing and socked subscribers with a price hike.

“Online is business that you really can’t grow without continuous spending on marketing,” Antioco said. “All of that will return next year, and we still expect to reach 2 million subscribers sometime in 2006 and to be operating Blockbuster Online profitably by early 2007.”

Blockbuster Online has 1 million subscribers, roughly one-third that of market leader Netflix.

Blue’s quarterly financial results were released after the close of market trading. Shares fell 10¢, or 2%, to $4.20 on the day.