Blockbuster Q4 earnings rise on subscription sales

U.S. same-store sales stabilize

By Danny King -- Video Business, 3/6/2008

MARCH 6 | Blockbuster’s fiscal fourth-quarter earnings quadrupled as the company edged closer to profitability for its online-subscription program by raising prices and slowed its decline in same-store sales. Blockbuster also said it would close fewer stores than in prior years and may enter the kiosk business.

Net income for the quarter ended Jan. 6 rose to $38.1 million, or 18¢ a share, from $8.3 million, or 4¢, a year earlier, the company said today. Revenue increased 3.6% to $1.57 billion.

Blockbuster beat analyst earnings expectations of 18¢ a share on $1.44 billion in sales, the average estimates in a Thomson Financial survey.

The largest U.S. movie-rental chain shrugged off competition from companies such as rental-by-mail leader Netflix by raising the prices on its Total Access online subscription plans by as much as $10 a month, which helped boost U.S. same-store and by-mail sales 6.1%. Excluding sales by mail, U.S. same-store sales, which increased in November for the first time in five years, fell 0.9% for the quarter, compared with a 5.8% drop a year earlier, the company said today.

“We’re more than ever convinced that the core DVD business can be a solid and profitable business,” Blockbuster CEO James Keyes said in a conference call with analysts this morning. By raising Total Access prices, the company started a “pruning process” that “allowed us to build what’s now a profitable model that is well positioned for growth.”

The company appeared to hold its ground against Netflix, which last week said its first-quarter subscriber count will be about 3% higher than previously forecast because of Blockbuster price increases and cheaper online advertising rates. Netflix also said it would quadruple its Blu-ray Disc selection this year and hinted at a possible partnership with Microsoft.

For 2008, Keyes said the emergence of Sony’s Blu-ray as a single next-generation DVD format provides “a big upside” and said Blockbuster was likely to close fewer stores this year than in recent years. He added that the company is “aggressively pursuing” opportunities in the movie-rental kiosk business, where companies such as Redbox are rapidly expanding units, but called kiosks “a very future-oriented opportunity.”

For the full fiscal year, Blockbuster lost $85.1 million, compared to net income of $39.2 million a year earlier, as it invested more in Total Access while cutting prices earlier in the year.

Blockbuster in December boosted Total Access subscription rates by as much as $10 a month in an effort to cut losses on the program, which allows users to order films online and return them to stores. The company effectively raised prices last July by limiting Total Access in-store rentals and introducing Total Access Premium, which it priced $7 higher than Total Access.

The company didn’t disclose a Total Access subscriber count for the first time since starting the service in 2006. Keyes said the company would begin tracking combined in-store and online subscribers, though he declined to say when those figures would be made public.

Full-year revenue increased 0.3%, to $5.54 billion.

“We continue to expect the company to make dramatic progress with its turnaround,” said Wedbush Morgan analyst Michael Pachter in a note to clients last week, adding that store closures in the competing Movie Gallery chain would help Blockbuster sales.

“We expect investment in retail initiatives to be funded from company profits, and the company will likely ensure profitability before spending significantly on retail expansion,” Pachter wrote.

Blockbuster said yesterday that it received exclusive windows to release films from IFC. Blockbuster has total exclusivity for the first 60 days after an IFC film is released to video and a three-year exclusive on renting the films.

The company also restated some of its previous earnings, saying that its loss for the three quarters ended Sept. 30 narrowed by $1.9 million while its 2006 earnings fell $4.2 million. The restatement is not material to total earnings, chief financial officer Thomas Casey said on the call today.