Blockbuster net income up as revs slide

Officials say results reflect focus on profit margins, cash flow

HOLLYWOOD — Blockbuster on Tuesday reported profits up 25% for the third quarter despite lower revenues and a sharp drop in same-store sales.

Net earnings for the quarter grew to $63.7 million, compared with $51 million, in the third quarter of 2002. Gross revenue declined to $1.38 billion compared with $1.39 billion last year, while same-store sales dropped 7.5% on a worldwide basis including a 7.1% decline in same-store rental revenue.

Total rental revenue decreased 2.4% to $1.10 billion compared with $1.12 billion in the same period last year.

In a conference call with analysts, Blockbuster officials said results reflected the retailer’s strategy, adopted in late 2001, to focus on improving its profit margins and cash flow by reducing its rental inventory investment and implementing other cost-control measures.

“While nobody likes to see declines in same-store sales, we firmly believe that the operating margin we’ve adopted is the right approach for improving earnings,” chief financial officer Larry Zine said.

The chain also posted strong gains in retail sales, which jumped 10.8% in the quarter, to $263.8 million, 19% of total revenues, compared with $238.1 million, 17.2% of revenue last year.

In the conference call, chairman-CEO John Antioco said the chain is taking steps to increase its rental inventory for the fourth quarter by striking a series of new DVD revenue-sharing agreements with the studios.

“Last year we said we weren’t interested in more revenue sharing unless the studios provided us with terms that maintained our margins and our flexibility. We’ve recently entered a number of revenue-sharing agreements that provide us with that.”

60% of pic rentals to be rev-sharing ones

Antioco estimated that 60% of Blockbuster’s movie rentals in the fourth quarter would be covered by revenue-sharing deals compared with around 45% in the third quarter.

Unlike Blockbuster’s earlier VHS revenue-sharing deals, the new agreements give the studios a percentage of the rev from sales of previously viewed discs, while allowing the retailer to begin selling used discs earlier in the release cycle.

Although Blockbuster officials declined to provide details of the deals’ terms, CFO Zine said they typically include no upfront cost for the retailer, or a small fee to cover the studio’s manufacturing costs.

Games sales soar

Game rentals for Blockbuster fell in the third quarter to $110.4 million, 10.1% of total rental revenue, compared with $115.2 million, 10.3%, of rental revenue last year.

Sales of new and used games surged, however, to $54.2 million compared with $32.2 million last year.

The company has branded its game store configuration Game Rush, which is now in 200 Blockbuster Video outlets in the U.S.

(Paul Sweeting is a reporter for Daily Variety sister publication Video Business.)

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