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Circling the Wagons

9 Nov, 2005 By: Erik Gruenwedel

A friend of mine recently dropped by the Blockbuster Video located on trendy Montana Ave. in Santa Monica, Calif., and was taken aback by how tired the storefront looked. He said the place looked so 1980s.

Right about now, Blockbuster executives would probably like to revisit those days, when the saying “Make it a Blockbuster Night” resonated among consumers, the media and the bottom line.

Instead, Blockbuster this week posted a $491 million quarterly loss and all but begged its top institutional investors to pony up $100 million so it could favorably amend for the third time with lenders financial covenants to $1.3 billion in debt.

Without the relaxed credit terms, Blockbuster not so quietly mentioned the specter of bankruptcy, a reality some observers believe is inevitable, regardless.

Someone e-mailed me a chart that showed Blockbuster and Movie Gallery enjoy 60 percent margins, which rival Starbucks. And nobody talks about Starbucks' revenue problems. But both Gallery and Big Blue's SG&A (sales, general and administrative) costs are triple that of Best Buy.

“You have to visit Tiffany's to get store operating expense anywhere close to those of video stores and Blockbuster has neither Carrera marble nor chandeliers,” wrote the e-mailer.

He said that if Blockbuster reduced its SG&A to 30 percent, even in a contracting market, the company's market cap “should increase at least eight-fold.”

In this week's investor call, Blockbuster chairman and CEO John Antioco said the company would implement serious belt-tightening while focusing on its core assets: retail stores and online.

As The Motley Fool's Rich Dupray wrote, however, “It looks to me like the company is really just getting dressed for its own funeral.”

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