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Rental decline hits Blockbuster hard

Vidtailer raises rates after weak Q2

WASHINGTON — Blockbuster is hiking prices for its online rental service as it battles to stem a rising tide of red ink.

The vidtailer on Tuesday posted a $57.2 million net loss for the second quarter on lower revenue and shrinking margins, compared with a profit of $48.6 million in the year-prior period.

News sent shares of Blockbuster plunging as it warned investors of more bad news to come.

Company officials backed off earlier forecasts that 2005 results would be roughly flat with 2004.

“As a result of the uncertainty and continued decline in the rental industry, we are no longer on track to achieve our previous guidance and cannot forecast 2005 with reasonable certainty,” said chief financial officer Larry Zine.

Company was also forced to ask its bank for a waiver of certain provisions in its credit agreement to avoid default.

In a conference call, Blockbuster chairman-CEO John Antioco said the traditional brick-and-mortar rental biz is declining more rapidly than expected.

“Earlier this year, we said the industry was trending down at 4% a year, based on the average of analysts’ projections,” he said. “So far this year, it looks to be trending down about 6%, and was closer to 10% in the second quarter.”

Blockbuster saw total revenue for the quarter fall 1.6% to $1.4 billion, including a 5.2% drop in rental revenue. Revenue from sales was up 11.4%, driven by strong gains in videogame sales.

“There seems to be a general malaise out there in consumer interest in movies,” Antioco lamented. “Growth in (DVD) sales has slowed to a trickle; the box office is having its worst year in a long time. Hopefully, we’ll have a stronger release slate in the fourth quarter.”

Blockbuster has taken several steps to try to reverse its fortunes, including an aggressive push into the online rental business dominated by Netflix.

Its online service passed the 1 million subscriber mark in the second quarter; Netflix has 3.2 million.

Blockbuster has seen rapid growth in its online business driven by low-ball pricing. On Tuesday, however, it said it will raise prices to equal those at Netflix in an effort to boost profits and cash flow.

Antioco said the move would not detract from his goal of reaching 2 million subs by early 2006.

Netflix said it had no plans to respond to Blockbuster’s price hike.

Blockbuster also eliminated late fees at the beginning of this year in a bid to attract more renters into its stores.

Antioco said the move is showing signs of working but the increase in rentals is not yet sufficient to offset the revenue lost from late fees.

Last year late fees accounted for 15% of Blockbuster’s revenue. Killing them cost the company nearly $140 million in the second quarter.

With rentals eroding faster than expected, Antioco said he’s no longer certain Blockbuster would be better off if it had been able to acquire rival Hollywood Video.

“The incremental cash flow would have had an immediate positive effect on our bottom line, but there’s no doubt there’s overcapacity (of stores) out there,” he said.

With Hollywood going to Movie Gallery, in fact, Antioco is predicting a bloodbath.

“There are too many Blockbuster stores across the street from Hollywood stores, and one of them is going to have to close,” he said. “Our job is to make sure it’s not us.”

Blockbuster stock closed down 11.49%, or 92¢, at $7.09.