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Antioco Claims Big Share of DVD Rentals

15 Feb, 2002 By: Joan Villa

Blockbuster's share of the domestic DVD rental market is higher than its nearly 40 percent VHS market share, said CEO John Antioco, in announcing a gain in revenues and narrowed losses for the No. 1 video chain's fourth quarter.

“More than 60 percent of U.S. DVD households rented from us last year,” he said.

Thanks to strong growth in DVD and international rentals, Blockbuster eked out 1.3 percent higher revenues of $1.36 billion in the fourth quarter from the year-ago period and boosted full-year revenues 4 percent to $5.16 billion.

Same-store sales rose 2.8 percent for the quarter and 2.5 percent for the year. Compared to the previous year's 7 percent climb, fourth quarter 2001 was “a good quarter in spite of a tough comp,” explained CFO Larry Zine. Store comparisons were further weighted down by declines in game rentals of 8 percent to 10 percent throughout much of the year, he added. Excluding games and international sales, domestic same-store revenues were up 1 percent for the quarter and the year, Zine said.

The retailer took one-time charges of $40 million in the quarter ended Dec. 31 and $400 million for the year for a remerchandising effort that removed 25 percent of VHS inventory and highlighted DVD rental. The charges resulted in a net loss of $4.5 million for the quarter versus a $24.6 million net loss in fourth quarter 2000. Excluding the charges, Blockbuster earned $21.5 million in quarterly net income and $11.7 million in net income for the full year, as compared to a net loss of $5.6 million in the year-ago quarter and a net loss of $56.9 million for full-year 2000.

For 2002, Blockbuster will add 300 stores evenly divided between the United States and international, and expand initiatives in DVD, games and consumer electronics, Antioco said.

DVD rentals are increasing among what Antioco termed “seasoned” DVD owners who have had players for more than a year, indicating that as more consumers purchase players, they will repeat traditional patterns of renting rather than buying packaged movies. As a result, Blockbuster now has DVD revenue-sharing deals with three studios and will negotiate new agreements as current deals expire.

“We'll be bringing in approximately 50 percent of DVD product this year through these arrangements at margins we're enjoying today, which are some 8 percent higher than margins on VHS product,” he noted.

This year the 5,000-store chain will continue remerchandising to emphasize DVD and game formats, expanding into game hardware with PlayStation 2 player sales in 3,000 locations now, followed by GameCube and Xbox before Memorial Day, Antioco said. Then the retailer will launch “try before you buy” guaranteed rentals, add new game sales, and even explore used “trading,” stand-alone game stores and online gaming — all with the goal of growing the category from 10 percent of revenue currently to 20 percent in 2003, he added.

Analyst Barry Sosnick with Fahnestock & Co. believes Blockbuster's quarterly results were “strong on all counts” and shows the retailer is focused on maximizing gross profits and return on investment, even while posting only modest revenue gains.

In addition, Blockbuster's push into games may be well-timed considering the high growth expected in the sector over the next few years. Also, recent bankruptcies among some games outlets such as Kmart could produce “responsiveness” among game suppliers to Blockbuster — an account that “immediately gets them into 5,000 stores,” he notes. With 28 percent of the chain's renters under the age of 18, Sosnick says the retailer has a “great demographic” and proven ability to merchandise and sell hardware and software.

“Blockbuster has been very successful in product lines that it's tested and added,” he said. “That's got to give confidence to video game suppliers that this will be a big and meaningful account.”

Blockbuster's stock climbed nearly 9 percent, or $1.70 per share, to close at $21.01 following the Feb. 12 earnings announcement.

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