Retailers Cautiously Upbeat Following a Soft Summer26 Aug, 2013 By: Erik Gruenwedel
Retailers focus on varying strategies to meet the challenging market
The home entertainment industry appears to be at a crossroads of sorts. DVD sales continue to decline while Blu-ray Disc penetration increases — albeit incrementally. And digital sales make the fiscal highlight reel, even if the revenue pales in comparison to physical.
Meanwhile, rental flourishes at low-margin kiosks, and all-you-can-stream subscription services generate buzz and dazzle Wall Street.
With Walmart and Target reporting disappointing financial results in their respective fiscal periods, it’s not surprising some home entertainment retailers profess only cautious optimism heading into the last four months of the year.
Walmart and Target — two of the top packaged-media retailers in the country — posted same-store sales declines and drops in net income.
While neither company cited home entertainment as a drag, it’s safe to assume that what ails Walmart and others at the macro level also affects packaged-media retailers Trans World Entertainment, Hastings Entertainment, and, to a lesser extent, Redbox and Netflix (excluding Blockbuster).
“Our U.S. retail outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures,” Target CEO Gregg Steinhafel said in a statement.
Indeed, Trans World, which operates f.y.e. (For Your Entertainment), the mall-based entertainment chain with 355 stores, saw a 3% decline in second-quarter sales of movies and TV DVD.
The chain, which operated 22 more stores during the previous-year period, had experienced a renaissance of late, reporting successive quarterly growth and profit as it increased video’s stake to 44% of $80.5 million in Q2 revenue.
Best Buy’s transition from physical to digital distributor of entertainment software resulted in a near 30% drop in second-quarter (ended Aug. 3) same-store entertainment sales, which include movies, music and games. Same-store entertainment sales dropped 22.1% last year.
The Minneapolis, Minn.-based consumer electronics retailer said entertainment represented just 5% of its $7.8 billion domestic revenue, compared with 8% during the previous-year period.
With CEO Hubert Joly underplaying packaged media in favor of online channels and the chain’s proprietary CinemaNow digital platform, it might be that mid-sized chain Trans World could aggressively seek to fill the Best Buy void. And the Albany, N.Y.-based chain did just that, opening seven new stores in the quarter. It also closed five locations.
But the jury is out regarding the impact.
“We feel we picked up a minor amount [of disc sales] from Best Buy, but it is too hard to tell [definitively],” Trans World CEO Bob Higgins said Aug. 22 in a fiscal call. “I think we’ll know better in the next six months.”
Russ Crupnick, senior media analyst with The NPD Group, cautions against great expectations. He said that f.y.e. has less than a 2% share of the disc sellthrough market. And unless the chain makes a significant investment in marketing, it’s difficult to envision a migration of Best Buy video customers to f.y.e. Crupnick said those customers are more likely to buy from Target or Walmart, or go online to Amazon.
Overall, Trans World reported a net loss of $2.5 million in the quarter, compared with a net loss of $1.9 million for the same period last year.
Eying Box Sets and Games
Hastings Entertainment said sales of DVD boxed sets, Blu-ray movies and select consumer electronics devices increased 3% in the quarter (ended July 31) — supporting Hastings’ strategy of focusing on niche growth categories with complimentary product lines, including accessories, hobby, recreation lifestyle, vinyl and tablets.
Amarillo, Texas-based Hastings posted a loss of $4.1 million. The retailer reported a loss of $3.2 million during the previous-year period. Total revenue dropped $8.2 million to $95.7 million. It closed five stores and operates 129 throughout the Southwest.
The chain said rental revenue from discs and games dropped to $12.9 million from $15 million last year, with same-store rental comps declining 10.9%. CEO John Marmaduke attributed the decline to the ubiquitous presence of SVOD and Redbox.
Regardless, Marmaduke eyes the fourth-quarter release slate of summer theatrical blockbusters, and the launch of next-generation video game systems as potential equalizers.
“With the expected future success of our new product categories, along with the expected launch of new game consoles, as well as an expected stronger release schedule, we are encouraged with our earnings prospects for the second half of our current fiscal year,” he said in a statement.
Indeed, Sony Computer Entertainment announced it will launch the PlayStation 4 in North America Nov. 15. Rival Microsoft reportedly is bowing the new Xbox One in November as well.
The new systems are expected to provide lifelines to a gaming industry beset with ongoing monthly revenue declines.
“I think video games will be strong in the fourth quarter, but I doubt that will translate to a pickup of DVD or music,” said Michael Pachter, analyst with Wedbush Securities in Los Angeles.
NPD’s Crupnick said fourth-quarter sellthrough is highly dependent on content mix, and whether consumers feel the titles are worthy of ownership.
“Sellthrough will also depend on increasing the base of Blu-ray customers and further developing UltraViolet,” Crupnick said, referencing the industry-backed digital locker platform in the cloud.
He believes Best Buy will continue to carry the top-performing summer tentpole titles on store shelves, such as Iron Man 3, Despicable Me 2 and Man of Steel.
“Catalog will undoubtedly suffer, but I’d be curious if they’d consider bringing in some bins or end-caps for Black Friday,” Crupnick said in reference to the post-Thanksgiving retail holiday that traditionally kicks off the winter shopping season.
Eric Wold, analyst with B. Riley & Co. in Los Angeles, agrees the fourth-quarter retail market will be dependent on summer box office. He said the crowded summer slate likely left some consumers eager to see missed titles.
“Not only will the successful movies drive disc demand, as is typically the case (consumers wanting to see a movie again), but others will look to revisit those movies they may have missed,” Wold said.
Rental: Stream or Go Red(box)
With new-release movies generally unavailable on SVOD, movie renting consumers are still left with myriad options — physical and digital — including more than 40,000 Redbox locations, regional and local video stores, by-mail at Netflix and Blockbuster.com, and transactional video-on-demand.
Rental icon Blockbuster is down to less than 300 stores nationwide, its corporate parent Dish Network still willing to underwrite the brand at a loss until the last store stands.
While making it a “Blockbuster Night,” has become anachronistic, locating a Redbox kiosk is easier than finding a Starbucks — and a whole lot cheaper, too. That’s because price and ease of access — not street date — have become key drivers of home entertainment consumption.
“We believe that the vast majority of [price-conscious consumers] will prefer to see new movies for $1.20 a day rather than renting them for $4.99 through transactional VOD,” Pachter said.
“So long as there are DVDs, we think that [Redbox’s] business model will remain intact, and we think that the extraordinary studio profit contribution from DVD sales all but ensures that discs will be around for years to come,” he said.