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Analysts: Blockbuster's Pre-Tax Earnings Deteriorating Faster Than Expected

21 Jan, 2010 By: Erik Gruenwedel

Blockbuster’s second downward revised fiscal year pre-tax earnings guidance suggests consumers are renting movies elsewhere, say analysts.

Eric Wold, analyst with Merriman Curhan Ford in New York, said the magnitude of the revision ($75 million to $85 million) was surprising, as the Dallas-based DVD rental service had maintained the original lowered guidance as late as the third quarter, ended Oct. 31.

Blockbuster spent considerable resources upping in-store stock quantities (130 discs per title) during the winter holidays of new releases with box office tallies above $20 million, including the month of December, which the chain said typically generates 30% of fiscal year income.

“However, it seems as though this didn’t matter to consumers if (in our opinion) they are going elsewhere to rent movies anyway,” Wold wrote in a Jan. 21 note.

The analyst believes the home video rental market is gravitating toward kiosk and by-mail pioneers Redbox and Netflix, respectively, both of which Wold covers.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said the results portend possible bankruptcy for Blockbuster.

“Given today’s news, we must question how long the company can continue as a going concern given its rapidly deteriorating performance,” Pachter wrote in a separate note.

Indeed, Blockbuster shares plunged more than 32% to 49 cents per share in midday trading.

Wold said the planned closures of 960 Blockbuster stores and 1,000 Movie Gallery and Hollywood Video locations could put $500 million to $600 million of annual rental revenues up for grabs, including $375 million to $450 million to the kiosk and by-mail rental channels.

Blockbuster is aggressively transitioning underperforming stores into Blockbuster Express kiosks with partner NCR Corp., in addition to maintaining a by-mail service with 1.1 million monthly subscribers.

Wold said Coinstar’s (Redbox parent) fourth quarter results, due Feb. 11, will be key whether they alleviate investor concerns about the fiscal strain workaround programs to obtain embargoed new releases from Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment have on margins.

“Should Coinstar report fourth quarter pre-tax earning margins from 16% to 17%, this would prove that Redbox can be financially successful even if [it] loses the lawsuits and the current temporary workarounds become permanent,” he wrote.



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