Blockbuster said Monday that it will take a $450 million charge this year as it accelerates its transition from VHS to DVD rentals.
The chain will eliminate 25% of its VHS inventory, along with selected games, in order to allow more room in stores for DVDs. By next year, the DVD format will account for at least 30% of the chain’s rental inventory, chairman and CEO John Antioco said.
Because of the differences in wholesale pricing of DVDs and VHS cassettes, DVDs produce higher profits for the retailer.
“By accelerating our transition, it should add two to three percentage points to our gross margins next year overall,” Antioco said.
Company is also changing the way it depreciates its VHS rental inventory, from an accelerated 36-month schedule to a nine-month sked. Under the former accelerated schedule, most of a tape’s value was written off in the first 90 days, so the change to a nine-month sked will not dramatically change tape accounting costs, Antioco said.
The residual value of VHS cassettes on the company’s books will be lowered to $2 from $8.
The chain also will begin selling DVD hardware in stores worldwide, after successfully testing player sales in the U.S.
The first $400 million of the primarily noncash charge will be recognized in the third quarter, the remaining $50 million in the fourth.
Blockbuster shares dropped more than 9% on the news.
Blockbuster told analysts last month that it expects very strong performance over the second half of the year, which should soften the blow to the company’s earnings from the charges. Had Blockbuster waited until the first half of 2002 to take the charges, it might have seriously impaired earnings amid what are typically weaker months in the first and second quarters of the year.
Blockbuster will promote its DVD initiative with new television advertising and in-store materials using the tag line “The best way to DVD is Blockbuster.”