Can Blockbuster Save Itself?

By closing stores and ramping up kiosks, the rental giant hopes to prevent collapse.

Closing signs in hundreds of store windows, staggering debt and a cratering DVD market. Is this the end for Blockbuster?

After years of getting it wrong, the once-proud rental titan is finally slashing stores and flirting with rental kiosks. Some analysts say they’re making all the right moves — but it may be too little, too late.

"They’re trying lot of different things, and best of all, the management of the company has shown they’ve very flexible," said Michael Arrington, an analyst with Adams Media Research.

When it comes to Blockbuster’s woes, the culprit is a shifting movie rental landscape that is beginning to favor video-on-demand and subscription services over movie rental chains.

Store closures are essential to the survival of the Dallas-based company that parted ways with then-parent Viacom in 2004. Here, Blockbuster has shown a willingness to wield the ax and not just the scalpel — it may shutter more than 950 locations by the end of 2010.

Randy Hargrove, a spokesman for the chain, said it was working to retain as many of its employees from closed locations as possible. (photo by Patty Boh/Flickr)

But its drive to cut overhead and raise profitability can’t happen fast enough. The beleaguered DVD chain’s third-quarter earnings, released Nov. 13, were dismal. Blockbuster reported a 21 percent plunge in revenue to $910 million, down from $1.2 billion the previous year. The company’s losses widened to $116.8 million, or 60 cents per share, from $20.6 million, or 11 cents, in the same quarter a year ago.

Its train wreck of a balance sheet has led Wall Street to essentially consider the teetering chain a penny stock. Blockbuster shares were trading for 62 cents on Tuesday.

To make matters worse, a pair of rivals is breathing down Blockbuster’s neck. Netflix reported 24 percent revenue growth last quarter, and Redbox, the kiosk rental giant, saw a whopping 90 percent surge in revenues over the previous three months.

"In the past they’ve been the late mover in the industry, and they’re in the part of the business, rental stores, that’s being the most hard hit," Stacey Widlitz, a retail analyst with Pali Research, said of Blockbuster.

The company also is struggling with onerous interest payments on some $962 million in debt, much of it a holdover from lease obligations remaining from the 2004 split with Viacom.

But there have been positive developments on that front. A debt refinancing agreement reached in September helped Blockbuster avoid bankruptcy by extending the life of its loans until 2014. Blockbuster also got a lift through $675 million it raised in a debt offering, which it plans to reinvest in stores and digital projects.

Prior to these moves, a liquidity crunch had compromised the company’s ability to reposition itself and had restricted the purchase of new inventory. The latter was a potential death sentence for a business that had long prided itself on having shelves overflowing with new releases; it also hobbled its efforts to ramp up a Netflix-style online service that started in 2004 but has been largely neglected since.

"They need to increase their inventory of new DVD releases as well as bringing in new video game titles, but it’s going to take a few quarters," said Charles Wolf, an analyst with Needham & Company. "If it doesn’t work, the company is toast. If it does, then the company’s stock is undervalued and it becomes a screaming ‘buy.’"

To illustrate how intensely the company has to focus on cost-cutting, an astounding 18 percent of the chain’s stores were unprofitable, according to a recent SEC filing. In closing stores, however, the rental chain has to be careful not to alienate the broad swath of the population that prefers their movies in disc form. Thirty-six percent of Americans now use rent-by-mail services, but a substantial chunk of people, some 45 percent, opt for traditional stores like Blockbuster, reports NPD Group, a market research company.

Here, though, Blockbuster appears to be showing sensitivity.

"The vast majority of our closing stores exist in close proximity to a Blockbuster store that is better-performing," said Hargrove. "We are committed to ensuring that we continue to have a store within a 10-minute drive of most neighborhoods."

Blockbuster plans to spend roughly $20,000 per store revamping nearly half of its surviving 4,200 locations with new paint, shelving and flatscreen TVs. More importantly, it also hopes to restore its reputation as the destination for the latest releases by replenishing inventory.

"They have to rebuild their store business, because they’re not going to survive by mail or digital," said Wolf. "They have to make those stores profitable again if they’re going to survive and pay back their debt."

Though Blockbuster has in recent years been slow to anticipate and embrace subscription services and video-on-demand, the company may have adapted a long-term strategy that will ensure its financial viability. For instance, it seems willing to cede the subscription and VOD business to Netflix, while targeting the kiosk business that represents some 19 percent of the rental market and has been largely monopolized by Redbox.

Blockbuster recently announced it had partnered with manufacturer NCR Corp. on a new line of rental kiosks, capable of holding 950 titles each (the typical kiosk holds between 200 and 400 DVDs). NCR will invest $60 million in the business. The partners expect to deploy more than 2,500 kiosks by the end of the year, which it will place in convenience stores and outdoor locations. It anticipates having 10,000 kiosks in operation by mid-2010.

But even those ambitions won’t put Blockbuster’s automated footprint in the vicinity of Redbox, which says it already has 17,000 kiosks around the country. (One feature Blockbuster’s kiosks will have soon is the ability to transfer downloaded movies to renters’ memory cards; they’ll then have 30 days to watch them.)

Neither Blockbuster nor NCR would comment on the structure of the deal, except to say that it is a licensing agreement and Blockbuster will take a slice of the revenues. Blockbuster also announced it will work with Motorola on a project to stream movies on its phones.

Moving into the kiosk business may prove vital to the company’s fiscal health, but despite its myriad afflictions, NCR believes that Blockbuster still has a viable brand name.

"The Blockbuster name was extremely important to us, because they are one of the preeminent names in the entertainment business," said Jeff Dudash, an NCR spokesman. "Our research shows that in a survey of the top six brands in DVD kiosks, in seeing which one they’d be most likely to rent from, more than half of consumers chose Blockbuster Express."

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(Homepage photo by 12Story/Flickr)