B’buster busts move

Chain retooling in pricey effort to save vid biz

NEW YORK — For Blockbuster, things are going to get worse before they get better.

Sales and profits will continue to slip at the troubled vid rental chain as it spends $90 million this year to salvage a declining rental business with new initiatives, including an online rental biz to take on Netflix and Wal-Mart.

Topper John Antioco said the company is beta testing its online rental service and expects to launch in the U.S. next quarter. Its U.K. online rental service launched in May. Ultimately, Antioco said he expects 10% of Blockbuster’s 17 million active renters to move online, accounting for 20% of revenue.

But investors should get ready for a whole lot of pain between now and then. Net income at the company plummeted nearly 25% in the quarter to $46.8 million from $61.2 million in the same quarter last year. Same-store sales decreased 4.4% from last year, with rental revenues dropping 6.4%.

Antioco said the company expects third-quarter profits to fall again in the single-digit percentage range and full-year earnings to fall as much as 30%. “There will be short-term pain and sacrifice,” said Antioco. “But we are determined to emerge from this crisis as a highly profitable entertainment brand.”

The vid rental chain is in the midst of a drastic retooling with the launch of an online rental business and in-store pic and game trading. Antioco says now that consumers have built up their DVD libraries, he wants to position Blockbuster as a “first mover” in what he believes will be a robust trading market.

Searching for answers

“I think they’re gasping and trying to find something that will work for them,” said research analyst Dennis McAlpine. “The online rental business has been a very expensive proposition. The whole thing seems geared toward keeping the customers they already have.”

Company expects a slow second half with what Antioco termed a “rental unfriendly” upcoming release slate and auds poached by the Olympic Games. Blockbuster spent heavily over the past six months getting its new initiatives off the ground and marketing “Monster,” for which it owns homevideo and television distribution rights.

Company expects the rental biz to stabilize by the end of 2005 as DVD penetration hits 70% in the U.S., but profits will continue to suffer as the company spends to remake itself.

In September the company said it will launch the exchange offer that will separate it from corporate parent Viacom, which holds 81% of Blockbuster equity.

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