Blockbuster Inc. on Wednesday posted a quarterly operating profit well below analysts’ estimates even before $1.5 billion in one-time charges, as it faced falling movie rental demand and higher costs to counter competition.
The video rental chain, whose shares fell to an all-time low, also forecast a significant slide in fourth-quarter profit with weakness continuing into 2005, and announced the resignation of President and Chief Operating Officer Nigel Travis.
Blockbuster has faced escalating competition from online video renter Netflix Inc. and may face more rivals as Internet retailer Amazon.com is seen by analysts as poised to join the movie-rental fray, which now includes Wal-Mart Stores Inc. as a competitor.
The company posted a third-quarter net loss of $1.42 billion, or $7.82 a share, compared with a profit of $63.7 million, or 35 cents a share, a year earlier.
Included in the loss was $1.5 billion in noncash charges as the company was required under accounting rules to adjust the value of intangible assets when Viacom Inc. spun off the company.
Excluding charges, profit was $3.4 million, or 2 cents a share, well below the average analyst expectation of 11 cents a share compiled by Reuters Research.
Revenue rose 1.8 percent, to $1.41 billion, helped by the weaker dollar, which boosts the dollar value of sales outside the United States. Same-store rental revenue decreased 6.3 percent, the company said, citing weak rental traffic industry-wide and high TV viewership of the Summer Olympics.
Counter measures
To counter competition, Blockbuster has launched its own online subscription rental service and has started letting customers trade in DVDs and games for store credit.
But the company has had to speed up spending in those initiatives, which is also cutting into profit.
Michael Pachter, analyst at Wedbush Morgan Securities, said Blockbuster is making the right moves.
“The business opportunity is large. The online model will work as it is merged with a brick and mortar store,” Pachter said, citing Blockbuster’s stores as an advantage over Netflix. Pachter rates the stock “buy” and said he expects the shares to double in price over the next year and triple in three years.
Chief Executive John Antioco told analysts that the company expects to have 500,000 online subscribers at the end of the year. Half of the subscribers have not shopped at Blockbuster stores in the past year.
At $17.49 a month, the online business would be a “nice profitable business” for the company with 2 million subscribers, Antioco said. He did not give a time-frame for reaching that level.
Blockbuster also said Travis, its president and COO, is leaving the company. With Antioco signing a new five-year contract, Travis is leaving in search of a CEO post of his own, Antioco said.
For the fourth quarter, Blockbuster expects profit to decline significantly from the prior year on an estimated low-single-digit percentage decline in worldwide same-store revenue, a significant year-over-year increase in operating expenses and other items.
The company also said it expects the rental industry to continue to decline next year, but believes it will stabilize by the end of 2005 as DVD penetration is projected to reach 70 percent of U.S. households.