Blockbuster Eyes Store Closures, Stock Surges

15 Sep, 2009 By: Erik Gruenwedel

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Investors continue to applaud efforts by Blockbuster Inc. to reduce costs.

Shares of the Dallas-based No. 1 DVD rental service Sept. 15 climbed nearly 7% in midday trading after it disclosed in a regulatory filing that it would shutter nearly 960 company-owned stores through 2010.

Blockbuster, which has reportedly shuttered 276 stores since January, has apparently accelerated closures to more than double the previously announced 425 closures.

In the filing Blockbuster said the closures would save about $30 million in annual costs, and include 35% and 47% core and non-core locations (including profitable stores), respectively. Another 18% of the closures are considered non-profitable locations.

The company said the accelerated closures would probably incur almost $60 million in costs associated with early termination of lease agreements.

Regardless, analysts welcomed the news even though they consider Blockbuster’s revised efforts to improve the bottom line comes at the expense of revenue.

Charles Wolf, analyst with Needham & Co. in New York, said Blockbuster realized that a “material percentage” of its stores were operating at a break-even or loss level.

“The game here is to become profitable, and if they do it on a lower revenue base, so be it,” Wolf told The Wall Street Journal.

Indeed, Blockbuster with partner NCR Corp. continues to aggressively rollout 2,300 $1-per-day rental kiosks this year, with another 7,700 slated through 2010.

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles who covers the stock, said the more Blockbuster cuts costs and can demonstrate that it can be profitable, the more investors feel comfortable investing in the chain.

“Will this solve all their problems...that will be decided over time, but it does look much more promising that this will solve many of their problems,” Woo said.

The closures do not affect franchise stores, which are independently owned. Blockbuster operates more than 4,300 company-owned stores in the United States.

Blockbuster shares were up 7 cents to $1.40 per share — the highest valuation since January.

Separately, a judge in Tennessee denied a motion by a Blockbuster franchise to prohibit Blockbuster from renting and selling movies electronically.

Southern Stores Video, which reportedly pays $2 million annually in franchise fees to Blockbuster for exclusive rental rights in select geographic area, in 2006 sued Blockbuster, claiming it violated terms of the agreement by renting and selling movies electronically.
 

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