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Late-Fee Loss Projections Don't Add Up

17 May, 2005 By: Holly J. Wagner

Like many writers, I'm what you could call a math bonehead. I check my work over and over, and submit it to the scrutiny of more capable ciphers just to be sure. So I'm looking for a bit of help with a math problem that is causing me some consternation because I just can't get it to add up.

I'm talking about the uncaptured revenue since Blockbuster Inc. declared the end of late fees. As soon as the company announced the program, CEO John Antioco told analysts and investors that the company stands to lose $250 million to $300 million this year in late fees they won't charge. That's his story, and he's sticking to it — at least in company press releases for the financial community.

But if you look at the 2004 annual financial statement, it says the company will lose $250 million to $300 million in operating income. That filing notes the company will lose (or just not capture) $400 million to $450 million in revenue by not collecting late fees. Then, in the latest financial press release — the first quarter since “no late fees” launched in the United States Jan. 1 — it says the company didn't realize $145.3 million in late fees for the quarter.

So now you see my math problem. $300 million should average out to $75 million per quarter. $450 million should average out to $112.5 million per quarter. So, if the trend holds, by my admittedly feeble calculation, this could easily run into $581 million by the end of the year.

OK, I'm willing to accept that it's a seasonal business, and averages may not address every situation. Does anyone out there have any research on late-fee trends? Is this pretty stable from quarter to quarter, or does it vary a lot? We might know better if the big chains hadn't stopped reporting late-fee revenue a few years ago, back when it was about 16 percent of annual revenue.

Blockbuster had better hope for the latter, or it's on a course that ends with a big blue train steaming over a cliff at full speed. No wonder the bond rating companies are slashing at the company left and right.

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