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Blockbuster Posts Profits, Cuts Stores

27 Jul, 2006 By: Erik Gruenwedel

Buoyed by a favorable $91.2 million tax audit and savings related to the closure of 164 stores, Blockbuster Inc. reported second-quarter (ended June 30) profits of $68.4 million, compared to a loss of $57.2 million during the same period last year.

Excluding the tax break and savings from store closures, including 48 non-Blockbuster branded locations and 116 company stores (95 in Spain), Blockbuster posted an adjusted net loss of $21.4 million.

Blockbuster CEO John Antioco, in an investor call, said the store-based rental industry had declined 15%.

“Over the next two years, the rate of [our] store closures will exceed the rate of decline in the market,” said Antioco. “It is the rational thing to do.”

Wall Street wasn't impressed, sending Dallas-based Big Blue's shares down more than 15% Thursday in mid-afternoon trading.

Domestic same-store rental revenues increased 3.8%, while same-store merchandise sales fell more than 26%. Total revenue dropped 5% to $1.32 billion, from $1.38 billion last year. Rental revenue fell 3% to $821 million, from $846.3 million during the same period last year.

Blockbuster CFO Larry Zine said the company had paid down more than $150 million in debt, including the outstanding balance on its credit revolver. The company said it reduced sales and administrative (SG&A) expenses $64.9 million from last year.

He said the company was “implementing plans” to improve international operations. Strong performing countries include Italy, Denmark and Ireland while challenges exist in the United Kingdom, said Antioco. Blockbuster this week announced it had terminated London-based Christopher Wyatt, president of international operations.

For the quarter, Blockbuster Online increased its subscriber base to 1.4 million, from 1.3 million last quarter, based on about 100,000 trial subscribers who converted to paying members. The company's in-store Movie Pass membership plummeted almost 58% to 800,000 subscribers from 1.9 million last year.

Antioco reiterated his belief that Blockbuster Online will achieve profitability by the end of the year based upon accumulating a 2 million-subscriber base through in-store promotions.

“Our stores are the least expensive recruitment channel we have,” Antioco said.

When asked to compare Blockbuster Online with competitor Netflix, which has more than 5 million subscribers, Antioco downplayed the impact of online rentals in the long-term.

“We're not at all convinced that [online rental] will dominate the market,” he said. “The fact is that most customers still like to rent exclusively at stores.”

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