Blockbuster Q2 loss widens

UPDATE: Higher merchandise costs drag 14% increase in same-store sales

By Danny King -- Video Business, 8/7/2008

AUG. 7 | The merchandise changes and store designs Blockbuster instituted this year under CEO Jim Keyes are bearing fruit—but at a price.

Sales at the chain’s new “Rock the Block” concept stores, which put a greater focus on selling electronics components and videogames, have been about 12% more than other stores during the first half of the year, with the company selling as many as 3,000 Blu-ray Disc players a week, Keyes said.

The more expensive set-top player and videogame inventory pushed the company’s second-quarter cost of merchandise sold to 19% of sales from 17% a year earlier, however, leading the chain to report a loss wider than analysts expected.

Blockbuster’s loss jumped 33% to $41.9 million, or 23¢ a share, from $31.4 million, or 18¢, a year earlier. Revenue increased 3.3% to $1.3 billion, as U.S. same-store sales rose 14%, the company said.

Blockbuster’s year-earlier results included an $81.3 million gain on the sale of its Game Station unit.

Blockbuster, which has about 7,600 stores, was expected to lose 19¢ a share on sales of $1.23 billion, the average analyst estimates in a Thomson Financial survey. Blockbuster's stock fell about 10% on the news.

“We are growing the core rental business, we’re building our retail business slowly but surely and we’re proactively transforming towards digital,” Keyes said.

Earlier this month, Blockbuster and automated-teller leader NCR Corp. began an agreement in which as many as 10,000 Blockbuster-branded DVD vending kiosks would be installed in yet-to-be determined retail locations by early 2010. The kiosks will let customers rent DVDs and eventually might let them buy and make digital downloads of certain titles, the companies said. Keyes said last week that the NCR agreement will begin with 50 DVD rental kiosks and 10 digital-download machines.

In July, Blockbuster also started beta-testing Movielink, the video download service it bought from the five major studios last year, within Blockbuster.com.

Keyes also said the company is exploring devices such as set-top boxes and game-console and Blu-ray-player connections to allow customers to digitally rent titles directly to their TVs and would provide further details “in the coming months.”

Overall, Blockbuster, which increased its subscriber base during the quarter by about 100,000 to 3.2 million, has been trying to boost customers as in-store DVD spending has flattened because of more digital downloads and an expanding movie-rental kiosk industry. U.S. DVD spending for the first half or the first half of the year was little changed at $10.1 billion, according to data compiled by Video Business and Rentrak.

Last month, Blockbuster withdrew a bid worth as much as $1.32 billion for No. 2 electronics retailer Circuit City, citing “market conditions” and chose to add electronics products to its inventory of DVD content. Blockbuster has "no plans to continue that course of action," Keyes said.

With higher U.S. store sales, the company said this year’s profit, excluding some items, would be as much as $315 million, up from its prior forecast of as much as $310 million.

Last month, competitor Netflix said its second-quarter earnings rose 3.8% after it accelerated its subscriber growth thanks in part to its video-streaming service. The biggest U.S. DVD-by-mail service in May introduced a set-top box allowing customers to stream content from an inventory of about 10% of its 100,000 titles on their TV sets.

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