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Blockbuster Amends Credit Facility

19 Mar, 2009 By: Erik Gruenwedel


Blockbuster Inc. has taken a step toward greater financial security, despite rumors of a possible bankruptcy in recent weeks.

Blockbuster Inc. March 19 said it reached an agreement with lender J.P. Morgan and others for an amendment through September 30, 2010, to its credit revolver.

The Dallas-based No. 1 DVD rental service said it planned to complete a $250 million funding of the facility in the coming days, which would represent about 65% of Blockbuster’s credit obligations.

Without the amendment, analysts were concerned whether Blockbuster could meet its debt obligations.

Blockbuster’s current $200 million credit revolver matures (comes due) Aug. 10.

In a call with analysts, CEO Jim Keyes said with the third party financing not assured, Blockbuster will continue to restructure $400 million in lease expenses and scale back retail initiatives in the first quarter of 2009.

He said the company would take a “conservative” stance regarding ongoing efforts to transition from a rental pure-play to an entertainment retailer, including seeking out partnerships with third parties.

Keyes said Blockbuster would focus on $200 million in cost reductions this year, since it has little control over revenue growth in the current economy.

“Even though $200 million in cuts sounds harsh, it’s only 10% of our total [sales, general and administrative expenses],” he said. “As the year progresses, we will be focusing on top-line growth and will be investing as liquidity allows.”

Keyes said the rental market’s biggest driver remains title strength, which he said lagged in the first quarter. He said first quarter releases such as Punisher: War Zone and Elegy were good movies but not box office hits.

Keyes said the year-to-date box office results, which included movies such as Watchmen, Slumdog Millionaire and Paul Blart: Mall Cop, portended better rental revenues in the future.

“This is great for our business in about three months,” he said. “There are some great titles coming out.”

The CEO said Blockbuster would continue to strive for profit in the Total Access by-mail, in-store return service. Analysts contend Netflix largely owns the by-mail market.

“We feel we are positioned to grow the by-mail business,” Keyes said.

He said the company would deploy Blockbuster-branded kiosks this year.

Same-store sales (open at least 12 months) in the quarter increased 4.4%, compared to a 0.9% decline last year. The increase was attributed to a 2.6% decrease in domestic rentals (which includes previously viewed sales) and a 36.5% increase in retail sales driven by video games, merchandise and consumer electronics.

Comp sales increased in all four quarters of fiscal 2008 (ended Jan. 4). It’s the first time in five years that Blockbuster has achieved comp-store increases for all quarters in a year. Yearly comps jumped 6.4% in fiscal 2008.

Blockbuster reported a fourth-quarter (ended Jan. 4) loss of $359.8 million, compared to income of $41 million during the previous-year period. The loss was attributed to a $435 million goodwill impairment charge, which meant actual adjusted net income totaled $80.4 million — exceeding analyst projections.

Total revenue topped $1.38 billion, down 12% from $1.57 billion last year when the quarter included an additional week and Blockbuster operated an additional 167 corporate stores.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, said the credit amendment bought Blockbuster breathing room.

“They are closer to being out of the woods, but not completely out yet,” Woo said. “Success will be determined in the future, but they are chugging along.”

The results sent Blockbuster shares up 13% to $1.01 in after-hours trading March 19.

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