Blockbuster reports Q1 profit

Same-store sales rise for the first time in five years

By Danny King -- Video Business, 5/15/2008

MAY 15 | Blockbuster reported first-quarter profit as it boosted same-store sales and made its online-subscription business profitable. The company also said it’s continuing its due diligence in the $1 billion bid it made for Circuit City in February; has redesigned about 6% of its stores to emphasize games, electronics sales and DVD sales; and is preparing to relaunch its Movielink download service.

The largest U.S. movie-rental chain’s net income was $45.4 million, or 20¢ a share, compared with a loss of $49 million, or 27¢, a year earlier, Blockbuster announced this morning. Revenue fell 5.4% to $1.39 billion as the chain had 412 fewer stores on closures and its sale of U.K.-based GameStation chain last year.

The company boosted U.S. same-store sales on a slight rise in rental revenue and a jump in sales of DVDs and games. Domestic same-store revenue increased 2.9%, with rental revenue up 0.4% while same-store merchandise sales rose 19.7%.

Blockbuster also turned a profit on its Total Access online-subscription service and held its ground against movie-by-mail leader Netflix by retaining 3.1 million subscribers, CEO James Keyes said on a conference call this morning. Blockbuster might earn as much as $100 million in profit from Total Access this year, chief financial officer Thomas Casey said on the call.

“We’re growing top-line results in an industry that was perceived to be in decline,” said Keyes. “Our strategy is in fact working.”

Blockbuster was expected to earn 15¢ a share on $1.44 billion in revenue, the average analyst estimates in a Thomson Financial survey. The company’s shares rose as much as 12% today after earnings were released.

Last month, Blockbuster said it made a $1 billion bid for Circuit City in February in an attempt to boost home-entertainment sales and profits and position itself for an increasingly digital future by integrating content such as DVDs and downloads with the media-delivery hardware sold at the No. 2 U.S. electronics retailer.

“We see it as a potential accelerator to our stated strategy,” said Keyes, adding that its due diligence should be completed in “weeks.”

Blockbuster, which has 7,700 stores, is trying to further boost in-store sales by developing concept stores that are more entertainment-oriented and put a greater emphasis on the fast-growing gaming market. So far, the 500 new “Rock the Block” and “Better Blockbuster” stores have had sales of as much as 12% more than the company’s other stores and have attracted as many as 5% more customers, Keyes said.

Blockbuster will roll out the design to the rest of the chain over the next couple years at a cost of about $50,000 per store. As part of the new stores, Blockbuster is partnering with NCR Corp. to develop kiosks that will allow in-store digital downloads. The kiosks will start appearing in stores in June and will be rolled out to most of the stores during the next two to three years.

“It does give the appearance of more of an entertainment retail environment than a traditional video store,” Keyes said.

“If Blockbuster stays the course on its own restructuring, continuing its focus on cost containment, revenue growth, asset sales and debt repayment, its shareholders will see a more immediate return,” wrote Wedbush Morgan analyst Michael Pachter in a note to clients earlier this week. “Blockbuster comps should benefit from Movie Gallery customer defections, lasting through the end of 2008.”

This summer, Blockbuster also is planning to relaunch its Movielink download service, though Keyes said the company is still having a difficult time securing the rights necessary for a subscription download business.

“Subscription is an important missing piece,” Keyes said. “We want our digital business to basically mirror our core business, with the ability to buy, rent and subscribe electronically.”

Blockbuster acquired Movielink last August for $6.6 million from a group that included Time Warner and NBC Universal units after the price for the movie-download service slid from more than $70 million. Movielink was launched by the studios in 2002.

Paul Sweeting contributed