Blockbuster will cut costs for refinancing

Company scales back product buys, looks to boost revenue-sharing

By Danny King -- Video Business, 3/19/2009

MARCH 19 | Blockbuster will try to cut costs for at least the early part of this year in part by buying fewer DVDs from the studios, as the largest U.S. movie-rental chain looks to reduce its debt by about $100 million to comply with a new refinancing agreement that extends a line of credit more than a year past its August due date.

The company, which today reported a fiscal fourth-quarter loss on a $435 million impairment charge, also said it would expand both its program of weekly and monthly in-store rental rates and the number of devices that will be able to play its digitally-delivered titles, while lobbying for better revenue-sharing participation from movie studios and videogames publishers.

Blockbuster has cut inventory of retail items such as videogame consoles and tapered off growth in its in-store stock of movie and videogames titles as it has tried to cope with a recent drop in same-store rental sales largely from a weaker slate of movie titles than a year ago, Blockbuster CEO Jim Keyes said on a conference call with analysts.

U.S. same-store sales increased 4.4% for the fourth quarter and 6.4% for full-year 2008 as Blockbuster expanded its retail offerings to include electronics components. The average title rental rate increased about 6% last year to $3.73, Keyes said. A weak slate of DVD releases has caused same-store rental revenue to decline in recent months, he noted.

Keyes, who estimated that more than 80% of Blockbuster’s business involved some sort of revenue-sharing agreement, also lobbied for movie studios and videogame publishers to continue to boost their participation in order to increase sales by ensuring better in-store selection.

“The one thing you can count on is cost reduction. What you can’t count on is top-line growth,” said Keyes, who added that this year’s comparable-store sales will be “somewhat lower.”

The company is also looking to boost its cash position by cutting annual general and administrative costs by about $200 million, slowing the pace of its store remodels, renegotiating for cheaper store rents and selling some of its overseas assets, chief financial officer Tom Casey said today.

By making the necessary cost cuts to reduce debt, Blockbuster will be able to comply with a refinancing agreement that extends the due date of about $250 million in debt to September 2010 from this August with JPMorgan Chase and other lenders.

Earlier this month, Blockbuster said it hired law firm Kirkland & Ellis LLP to provide advice on how to address the expiring debt. The company later that day denied a Bloomberg News report that cited a person familiar with the situation as saying the chain was exploring a possible bankruptcy. Blockbuster shares that day fell as much as 86%.

Such stock performance—Blockbuster shares had dropped 75% in the past year before today—contrasts with competitor Netflix, whose shares reached a record high yesterday. The No. 1 U.S. movie-rental service via mail, whose stock has increased 19% in the past 12 months, said in January that its fourth-quarter profit surged 45% as its customer base grew faster than it forecast and the retailer cut costs related to acquiring new subscribers.

For Blockbuster, debt had become a growing concern as the company attempted to turn around its operating performance.

“The proposed refinancing will not be inexpensive, but it’s designed to provide the liquidity to complete our business transformation,” Keyes said.

Blockbuster’s net loss for the quarter ended Jan. 4 was $359.8 million, or $1.89 a share, compared with net income of $41 million, or 18¢, a year earlier, as revenue fell 12% to $1.38 billion. Excluding a $435 million impairment charge and other items, profit increased to $80.4 million, or 40¢ a share, from $57.8 million, or 26¢, a year earlier.

The company also is trying to boost foot-traffic by expanding its “Choose Your Terms” rental program to its approximately 3,900 U.S. stores from the current 600 locations, Keyes said.

He added that, although digital delivery was “still a relatively small market,” Blockbuster planned to make its video-on-demand service available through a wider range of electronics components this year. Late last year, Blockbuster started selling a set-top box that plays digital downloads from Blockbuster.com directly on consumers’ TV sets. The chain also integrated what had been known as its Movielink digital download service into Blockbuster’s Web site in July.

In January, Blockbuster agreed to join with online movie service CinemaNow to create Blockbuster Powered by CinemaNow, which will start delivering movies to Blu-ray Disc players, Internet-connected TVs, mobile phones and even the iPhone later this year. The multi-year preferred-provider agreement between Blockbuster and Sonic Solutions, which acquired CinemaNow late last year, will put the rental giant on some of the same devices through which its main online rival, Netflix, has already begun streaming its own digital content.

Blockbuster last year agreed to develop movie-rental kiosks with ATM leader NCR and is now in the “final stages” of testing the machines, said Keyes. He maintained an earlier estimate of having as many as 12,000 kiosks operating by the middle of next year. Keyes added that the company has been able to maintain pricing on its Blu-ray discs because companies such as Circuit City are no longer using the format as a loss leader.