Vidstore shares fall as DVD sales bite biz

Blockbuster CEO sees growth for stores

The DVD sell-through boom continues to take its toll on the brick-and-mortar video rental business.

Shares of No. 2-ranked video retailer Hollywood Entertainment took a dive Tuesday, as the rental chain warned — for the second time in just over a month — that its earnings for fourth-quarter 2003 would clock in considerably lower than expected due to sluggish rental traffic.

The Wilsonville, Ore.-based chain reported same-store sales for the fourth quarter would come in up 12%, driven almost entirely by video and game sell-through, while rentals for the quarter were down 2% from the same period last year, despite the fact that there were more new releases into the video window this year. The company had hoped the strong Christmas video release slate would boost rental revenues by at least 3% from last year. But that forecast proved overly ambitious. For the last two weeks of December, rentals were off 9% from the same period a year ago.

Company blamed an increase in DVD sales as the main culprit. The rental decline seems odd given the huge growth in DVD rentals. Some pundits speculate that subscription services such as Netflix, as well as deep sell-through discounting at Wal-Mart and other mass-market retailers, may be stealing some of the traffic.

Company said its Q4 and full-year earnings would fall short of its already diminished targets due to weak rentals. In addition to the gloomy Q4 guidance, company warned 2004 isn’t looking much better, noting customers increasingly are looking to purchase movies rather than rent. Announcement sent Hollywood Entertainment shares down more than 10% to close at $12.62, near their 12-month low.

In early December, Hollywood warned same-store revenues would be up only 7%-9%, rather than the 11% previously predicted for the all-important December quarter.

Hollywood Entertainment operates more than 1,900 stores and some 600 Game Crazy videogame stores.

Blockbuster bullish

Hollywood’s bad news didn’t stop rival Blockbuster from putting a bright face on the current video market travails. The Viacom-controlled chain also reported sluggish rental growth in the third quarter, which some observers had ascribed to the chain’s over-reliance on VHS over DVD. But Blockbuster chairman-CEO John Antioco is still a big fan of the retail store model; he challenged investors to look past the “perception” of a threat to Blockbuster’s business to its long-term opportunities.

Speaking Monday at the Smith Barney Conference, Antioco dismissed naysayers who claim Blockbuster will be undermined by new video-on-demand technology and alternative DVD sell-through channels.

“There’s absolutely nothing wrong with our business. What is wrong is people’s perceptions about our business,” Antioco said. “What they miss is the opportunity. The potential threats are well identified, and certainly we think there are distractions through competition … but don’t believe we will be extinguished in a puff of technology.”

New models

Antioco outlined his four-pronged plan for growth, which includes a full-scale in-store subscription rollout combined with a new online rental subscription service. Keenly aware that mass retailers who deeply discount discs may be stealing their thunder, Blockbuster said it was stepping up efforts to increase its share of DVD sales, partly through selling second hand discs through a trade-in scheme.

Antioco brushed off the notion that cable VOD would seriously cannibalize Blockbuster’s rental business. His faith rests in the fact that the studios earn $12 billion in gross profits from homevideo and DVD, which dwarfs the $500 million generated by pay-per-view and nascent VOD.

The Blockbuster chief was equally dismissive about the piracy threat, noting DVD rental offered a cheap alternative that does not exist in the far more exposed music industry.

Antioco refused to discuss Viacom’s intentions regarding the fate of its controlling stake in Blockbuster. But few believe a deal to sell the chain is imminent. Price is thought to be a major stumbling block for an outright sale, since anything less than $3 billion could seriously dilute Viacom shareholder value.

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