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Blockbuster to Put Movie-Trading Concept Into 2,000 Stores

21 Apr, 2004 By: Holly J. Wagner

Blockbuster Video will start letting customers spend their DVDs almost like cash at 2,000 stores by the end of the year, chairman and CEO John Antioco said today.

The company already offers its Big DVD Trade-In program, which lets customers buy selected new releases at a reduced price with a DVD trade-in, chainwide. The new program, in tests in two markets chain spokesmen wouldn't identify, lets customers trade used DVDs for credit for anything in the store, including new and used movies and games, rentals and merchandise.

“We have seen an increase in customer visits, active membership and new members in the two markets were we introduced the trading program,” Antioco said. “Additionally, trading has helped improve customers' perception about Blockbuster's retail movie prices and selection. We believe trading has the potential to drive retail sales of both new and used movies and is yet another way to distinguish ourselves from the competition.”

Most of the stores adding the movie trading concept will make the change between August and November, he said.

“Our plan is to offer movie trading in approximately 2.000 Blockbuster stores worldwide by year end… we believe trading can be a significant contributor to our profits in the future,” he said.

Trading is clearly a central part of the Blockbuster strategy going forward.

“We will strive, all in all, to have somewhere between a 35 percent to 40 percent margin on DVDs that are traded in at an average price of somewhere between $9 and $10. So gross profit dollars per transaction on the sale of a previously owned DVD will actually be our most profitable [movie] transaction,” Antioco said. “The magic then is, how do I offer the customer enough significant value that they are going to want to trade in their DVD that they are not using, and what can I sell that DVD for to another customer that wants to watch that movie.”

As the company expands its Game Rush store-within-store concept, game trading is expected to be a major pillar of that business as well.

“In the U.S. by the end of the summer we will have opened 250 Game Rush locations, bringing our total to 400,” Antioco said. “Once we have established sufficient critical mass, we plan to let the world know that Game Rush pays the best prices for previously owned games and sells them at the lowest prices, guaranteed.”

The chain will also roll out in-store and online subscription programs, but likely will not have the two integrated until early next year, Antioco said. The in-store program will get a soft launch in May and June. Pricing for the online program has not been announced and Antioco hinted the chain might try to undercut Netflix, although the in-store subscription fee will be $24.99 per month, $3 higher than the online price Netflix will charge starting in June.

Forty percent of Netflix customers are current or former Blockbuster customers, Antioco said, and Blockbuster wants to capture at least 30 percent of what executives see as a 3 million- to 5 million-customer market in the near future. Netflix has nearly 2 million subscribers.

“In my opinion, it is not a question of if we will be successful. I believe we will be,” Antioco said. “The metrics of our success by the end of 2005 will be: we will have established our in-store subscription program and have 10 percent of our active, monthly members paying us a monthly fee; as a result, our share of the domestic rental business will continue to grow and we will have positive comp-store growth; we will have achieved a 30 percent share of the online rental business and we will have established movie trading as a $100 million-plus and growing business. We will have established Blockbuster as a force in the game business with 1,000 game store-in-stores.”

Blockbuster expects profitability to slide in the mid-single-digit range in the second quarter on an estimated decline in worldwide same-store revenues. The company expects to spend between $70 million and $90 million to develop the new initiatives next quarter and between $250 million to $280 million by the end of the year, compared with $176.8 million in capital expenditures in 2003.

That and continued weakness in the rental industry are expected to drain about 10 percent by comparison from the adjusted diluted earnings per share of $1.48 for all of last year, and possibly more if costs are higher or the rental market does not improve.

The company expects to open 400 company-operated stores this year.

Already, some analysts were doubting that parent company Viacom, which plans to spin off Blockbuster in July, will let the No. 1 rentailer spend the necessary money to meet its ambitious goals.

"There is no way that Viacom is going to allow Blockbuster to spend that money. Viacom does not believe this is a growth business," analyst Michael Pachter of Wedbush Morgan Securities Inc. told Reuters. He also disputed Antioco's claim that the chain has not yet felt the sting of new technology like Internet downloads and video-on-demand.

Blockbuster's worldwide same-store revenues were down 7 percent, and domestic same-store revenues slid 10.2 percent in the quarter ended March 31 compared to the same quarter a year ago, according to company financials.

Total revenues decreased 1 percent to $1.5 billion for the first quarter of 2004 from $1.52 billion in the quarter last year. Total rental revenues decreased 3.7 percent to $1.15 billion for the quarter, compared with $1.2 billion for the first quarter of 2003. Worldwide same-store rental revenues decreased 8.2 percent, which executives attributed primarily to a weak first quarter release slate and “weaker than anticipated rental traffic industrywide.”

"Our gross margin and profitability for the quarter continued to be strong although our revenues were impacted by an extremely challenging environment including a much lower box office and lighter-than-anticipated traffic industrywide," Antioco said. "Importantly, we made significant progress with several key business initiatives and are on track for the national launch of our rental subscription programs, both in-store and online, the rollout of our movie trading initiative and the expansion of our store-in-store game concepts. We are making substantial investments in these programs this year and believe they position Blockbuster for future growth."

The company's selling, general and administrative expenses were higher in the quarter, primarily because of theatrical marketing costs for Monster, for which the company owns home video and television rights.

The company had a one-time $37.1 million tax benefit related to the resolution of a government tax audit extending from 1997 to 2000.

Gross profit was up 4.2 percent to $923.6 million from $886.1 million in the same period last year. Executives credited gross margin expansion, the impact of favorable foreign exchange rates and the net addition of 142 company-operated stores. Rental gross profit for the first quarter of 2004 increased to $826.3 million from $811.7 million for the first quarter of 2003. Rental gross margin for the first quarter of 2004 grew 390 basis points to 71.8 percent, primarily because of a continued focus on improved product buying, according to financials.

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