Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  


James W. Keyes – Chief Executive Officer, Chairman

Thomas M. Casey – Chief Financial Officer, Executive Vice President

Angelika Torres – Director, Investor Relations


Carla Casella – J.P. Morgan Securities Inc.

Tony Wible - Citigroup

Barton Crockett – J.P. Morgan Securities Inc.

Stacey Widlitz - Pali Research

Marla Backer - Research Associates, LLC

Stacey Widlitz - Pali Capital

Blockbuster Incorporated (BBI) Q3 2007 Earnings Call November 1, 2007 10:00 AM ET


Welcome to the Blockbuster Incorporated 2007 third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mrs. Angelika Torres, Director of Investor Relations.

Angelika Torres

Good morning and welcome to Blockbuster’s third quarter earnings call. Today’s earnings call may include forward-looking statements relating to our operations and business outlook, financial and operational strategies and goals, and other matters that do not strictly relate to historical or current facts.

Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding the forward-looking statements and factors that could cause actual results to differ materially, please refer to the cautionary statements in today’s earnings release and our public Securities and Exchange Commission filings, including our upcoming form 10-Q.

Today’s earnings call may also include discussion of certain non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliation to the most directly comparable GAAP financial measures and other related disclosures. Our earnings release is available on our website at under the link for investor relations. With that I will now turn the call over to Jim Keyes, our Chief Executive Officer.

James W. Keyes

Good morning. Today I will plan to discuss some of our strategic priorities that we outlined in the last call. We made a lot of progress on those priorities. Following that Tom Casey, our CFO, will cover the details of the financial results of the quarter, which I believe you will agree, begin to show some progress toward improving Blockbuster’s financial stability. I’d like to take this opportunity, though, to once again welcome Tom to the team. And you will be hearing more from him in a few minutes.

On our last earnings call, we highlighted a number of objectives for the first 100 days of our transformation. We’re very pleased with the accomplishments across the broad range of areas, and one of the first priorities was the establishment of a new leadership team. We’re pleased with the development of that team including our newest member Eric Peterson, our general counsel; Tom Casey our CFO, and two resources that I recruited from my old 7-Eleven team, Dave Podeschi, our Senior Vice President of Merchandising and Logistics and Keith Morrow our CIO. This team has already hit the ground running and is aggressively working on Blockbuster’s transformation.

While building a new management team we also completed a total reorganization and reduction of costs. There were many opportunities as you can imagine for improving efficiency throughout the organization, eliminating layers, flattening various organizations; for example we now have only three layers of management between the CEO and the store manager and additionally my direct reports have increased from four to about twelve. Both moves designed to accelerate communications throughout the organization and to eliminate nonessential work and streamlining, which allowed for a reduction of over 400 positions and is expected to produce $45 million in cost savings on an annualized basis.

This morning’s press reported we plan on job cuts but I want to assure you that necessary actions to achieve the $45 million in savings have already been taken. And as we bring more focus and more technology to our business I do believe there will be further cost reduction opportunities. We continue to explore areas that we’re outsourcing, perhaps of certain functions could help provide both cost reduction and improved efficiency, and we’ll keep you updated as we have further progress in that area.

Another objective in the first 100 days was to complete a thorough assessment of our technology spending. As you know our online business has been the focus of aggressive new investment during the past few years. But before continuing on that path it was important to understand and thoroughly assess that strategic direction.

That assessment made us even more committed to Total Access and the competitive advantage that it provides by allowing us to marry the convenience of physical distribution through the stores with electronic distribution online. It has also caused us though to redefine the Total Access program to better meet the convenience needs of all of our customers.

So accordingly, we modified our approach to the online business. What had been an online model was really not a digital solution previously; it was more of a competitive response to the demand for by-mail delivery of DVDs. In fact we credit Netflix with the development of that niche, but recognize that our pursuit of by-mail subscribers was a bit over-zealous.

Clearly our spending on that one channel was exceeding our returns. So frankly we believe we fueled much of the growth in the by-market channel during the past three quarters by aggressively promoting Total Access subscriptions, and particularly promoting it in our stores. As a result we did achieve a significant boost in subscriber count but we attracted some of the most price-sensitive and the heaviest consumption customers with our offer of free in-store exchanges.

Our aggressive growth proved the competitive strength of Total Access but it also demonstrated the cost.Our objective must be profitable growth, and toward that objective we made two deliberate moves: one to dial back our advertising and minimize the promotion of Total Access in our stores. By doing that we wanted to take a step back, evaluate the profitability of all of our customers across all segments and find new cost-effective ways to attract and retain profitable subscribers from channels other than our stores.

A second move was to modify the offerings under our Total Access program to provide better value for by-mail only customers while also capturing greater returns from those seeking unlimited access. This was a conscious effort to prune the tree and in other words, we were willing to walk away from some of our subscribers, those at the far end of the usage scale who are not willing to pay a higher price for unlimited free exchanges.

One of those customers in fact was quoted in Newsweek saying, “in the nine months since I joined Total Access,” he said, “over 200 titles have been mailed to me. That is 200 titles that I returned to the store and got a freebie off of. It worked out to about 36 cents per DVD which means they lost a fortune on me just on postage fees.”

Well, when we read that we challenged his math a bit; it is not exactly correct but he does certainly raise a good point. And the net result of the quarter, after our changes, was in fact a decline of about 500,000 subscribers, some of whom were in that category and whom we were happy to see move to the competition.

Included in that total through were also approximately 300,000 of non-paying trial subscribers and we’re confident that many of them simply went back to shopping in our stores. Since the competition in that channel grew by only 286,000 subscribers, many of whom were likely a result of our churn, we believe that the moves we made were timely as well as prudent.

While some interpreted those moves as an indication we had given up on our online business, I can assure you that we are even more committed to the use of new technology to find ways to give our customers convenient access to media entertainment. During the third quarter, we simply took a break in the action to assess and redefine our growth plans; a break that we think was well timed because we are now much better positioned to pursue a more rational growth plan going forward.

Accordingly the next objective of the first 100 days was to build a strategic roadmap along with a financial plan that will define our mission, outline our strategic direction and establish that appropriate balance between investment spending and improved shareholder value. We made significant progress toward that plan and hope to share more detail with the investment community on November 8th at an analyst meeting in New York City.

In essence, that plan begins with a shift is our mission from renting DVDs to what will be now convenient access to media entertainment. In-store this means being in stock on the top new releases. Online it means providing the highest level of convenience to our customers whether they wish to have DVDs by-mail, to exchange them in the stores, or to consume their media content via download to their PC or portable device.

We are positioning our business to accommodate all of those objectives, with three overarching strategies behind the mission that are simply: to restore and grow our rental DVD business both in-store and by-mail; to facilitate in-store transition from rental to retail, and to position the company for the eventual transformation from DVD to digital.

The first of these overarching strategies is the plan to enhance our core rental business, and we’re pleased with the progress to date in identifying opportunities for improvement and we’re already beginning to capitalize on those changes. Frankly DVD rental demand has been relatively stable for the last few years in spite of the many alternatives available to customers, but our stores have had a disproportionately large drop in revenue during those past few years. Some of this was perhaps self-inflicted. For example, as Total Access grew in popularity, the in-store exchanges offered under the program depleted inventory, contributing to customer dissatisfaction.

In-store you will see a return to fundamentals such as staying in stock on new releases, simplifying our pricing and improving our customer service. We are confident that the continued closing of competitor locations will create new opportunities for our core business. That new formats such as Blu-ray will provide incremental opportunity for the rental channel. And that differentiated offerings, such as our exclusive movies from the Weinstein company, offer new ways to grow. While core DVD rental business perhaps is mature it still offers many avenues for new areas of profitable growth.

The second strategy, I mentioned the evolution of our stores from rental to retail. For the long-term success of our stores and really for the practical ability to generate return on invested capital for our real estate, we must over time supplement our rental business with improved retail sales. To accomplish this we’ll have to develop a merchant culture; a culture that leverages the real estate we already have and captures new sales opportunities in the converging markets of entertainment content and delivery devices.

There are many opportunities within the store such as improving our ability to sell as well as rent DVDs. We could sell movie soundtracks; movie posters are going quite well in the stores today, as well as improving our impulse snacks and beverage assortments. An important step in this direction is our recent move to put retail copies of DVDs on the new release wall right next to rental. The movie Transformers, as an example, sold over 200,000 copies in the first week, possibly a record for our channel by taking a more proactive stand in trying to work to both sell and rent that title.

The third strategy: to develop a retail digital and digital capability. This will allow us on the digital side to keep pace with the changing need for convenient access to media entertainment. An important step toward that objective was our acquisition of Movielink which allows us to offer customer access to one of the largest collections of digital content now available, and access new releases via the internet.

Our plan is to fully integrate the Movielink site into with enhanced functionality and an improved user interface. We expect improvements in the Movielink integration will be completed by the first quarter of next year. Meanwhile we have a number of exciting initiatives planned for the fourth quarter that will demonstrate a new way of thinking about our online presence and the continued development of true Total Access.

Total Access proved to be a valuable competitive advantage for the by-mail space and will be even more of an advantage as we move into a true digital delivery concept. Not only do we believe in Total Access, but we believe it should mean more than online or by-mail subscription with the core competitive advantage of Blockbuster being in fact, Total Access any way you want it.

So as you can see, the stores will represent an important competitive advantage in our fully integrated approach to providing convenient access to media entertainment. But accordingly, another of our objectives during the first 100 days was to establish a proactive asset management plan.

On the global horizon that plan is to selectively license some of our international markets to sell the physical assets while developing a license relationship that will allow us to retain brand presence and redeploy capital. Longer term, a strong license presence in each country can significantly establish the Blockbuster brand, facilitate growth and yet set the stage for a future digital offering in each of those international markets.

For domestic stores our plan is to establish a number of new store prototypes that will allow for testing of various formats. Among the format changes are stores that emphasize gaming; an interactive kids area; a test of video-enabled electronic devices, and several other variations, with the development of these prototypes already underway and our expectations for remodeling of the stores beginning in January of this next year.

This quarter we have made solid initial progress. I think as you can see in our broader transformational efforts, our goal is to position Blockbuster to be a major player in the $35 billion entertainment industry. Each and everyday we have approximately 2 million customers shopping with us in-store and online. And that existing customer base represents one of our most valuable assets.

As we create a culture and a business process at Blockbuster that is responsive to change and as we’re able to keep pace with the changing needs of those customers, I’m confident that we can close the gap between what we are today and what we know we can be in the future.

Thank you and I’ll now turn it over to Tom to go through some of the financials.

Thomas M. Casey

As Jim said our third quarter results demonstrate progress toward improving Blockbuster’s financial stability. Before reviewing the specifics of our third quarter results, I would like to first review our financial priorities.

  • First: align Blockbuster’s capital structure with the new strategic plan. We are currently highly leveraged and will continue to evaluate ways to reduce debt and optimize our capital structure.
  • Second: improve clarity in financial reporting. As our business continues to evolve strategically we will explore ways to clearly communicate the financial effects and other metrics that track our transformation.
  • Third: operating within the requirements of our credit facility. We reiterate the commentary from the last earnings call in which management conveyed competence with respect to our compliance with bank covenants and requirements.
  • Fourth: focus on return on capital. Consistent with Jim’s commentary on online spending, all spending will be measured by return on capital and clear benefit to shareholders.
  • Fifth: financial and operating expectations. Next month we will complete our internal budget for 2008 incorporating the new strategic initiatives. Our intention is to communicate a range of financial and operating expectations for 2008 in conjunction with our fourth quarter earnings release in February.

So the top financial stories for the quarter are the decisive actions we took to improve online profitability, and implementation of a $45 million cost reduction plan. In the first two quarters of 2007 Blockbuster experienced significant declines in profitability due to investment in Total Access. The actions taken during the third quarter are reflected in a $47.3 million increase in rental gross profit from the second quarter of this year.

As Jim said, the company’s emphasis is on growing the overall customer base through its stores, through the mail and eventually through digital delivery of content. Going forward we will concentrate and report on growth of our total membership.

As for year-over-year comparison of results I’ll start with revenue. And the revenue story is best explained on a same-store sales basis because of the significant change to our store base. Since September 30, 2006, Blockbuster sold or closed 526 stores worldwide. Included in that 526 store number are 217 Gamestation stores sold in the U.K. for $150 million. That sale was consistent with our focus on improving domestic operations and delevering.

Currently we’re in the process of developing an overall asset management plan and as part of that, evaluating various new store formats as Jim said, as well as change in the competitive landscape. We have decided to limit additional store closures until we have that plan in place.

So worldwide same-store sales increased 3.5% as strong growth in online rental revenue and international games retail outpaced declines in domestic in-store movie rentals. Online revenue grew 122.4% from $64.7 million to $143.9 million and now comprises 11.6% of Blockbuster total revenue. International retail comps increased 28.2% as a result of strong sales of games, particularly Halo 3 in many of our international markets.

Our gross profit decreased by approximately $76 million relative to the third quarter of 2006 and the key drivers of year-over-year change are as follows: first, rental gross profit decreased by $48.5 million in the quarter, primarily due to approximately $29 million in the cost of free in-store exchanges under the Blockbuster Total Access program.

Retail gross profit decreased by approximately $19 million in the quarter largely due to the sale and closure of the 526 stores, including the sale of Gamestation, and was partially offset by an increased focus on sales of hot new releases of movies, games and other merchandise. And that’s part of our new retail strategy. However the gross margin declined by 350 basis points from 2006 to 23.4% as a result of the change in that product mix.

G&A expenses for the quarter decreased $51.9 million from the third quarter of 2006, largely due to a decrease in compensation and occupancy costs. As I mentioned before this quarter we put in place a plan to reduce our annualized G&A by approximately $45 million and you will start to see benefits of that in Q4. And we continue to evaluate opportunities to reduce our cost structure further.

Two final points on page 4 of the financial tables, the new table with adjusted EBITDA of $46.7 million for the third quarter. This includes add backs of $1.7 million of lease termination costs and $7.9 million of severance costs. Finally the company reduced debt including capital lease obligations by $154 million from the third quarter of 2006, and that was principally the result of the sale of Gamestation.

To conclude, we are excited about Blockbuster’s new strategy and look forward to future discussions of results with some of the new initiatives in place. As Jim discussed, our ongoing transition toward a merchant culture combined with the successful execution of our new strategic initiatives, should provide us with a solid foundation on which to build a new Blockbuster - a Blockbuster that’s positioned for growth, greater value-creation, and sustainable earnings improvement over the long-term. Now with that we’ll open to questions.

Question-and-Answer Session


Your first question comes from Carla Casella – JP Morgan.

Carla Casella - JP Morgan

Good morning. I have a couple questions related to the game side of the business. Third quarter was clearly strong because of Halo. I know that fourth quarter last year probably was strong driven by the game boxes. Is there any way looking to fourth quarter this year, we can try and segment out how much of last year’s fourth quarter was the game boxes versus new software? And/or your outlook for new software for this quarter?

James W. Keyes

We are in the position for the fourth quarter of trying to assess all of the elements of our in-store business, with gaming being one of the most important. I can’t give you the breakdown now, perhaps Angelika can work with you after the call to more specifically answer the question about last year fourth quarter. But all I can tell you at this point for the fourth quarter, we will be looking at some opportunities that are different from the past, relative to both equipment and games. But please keep in mind this is much more of a transitionary quarter for us as we do more testing than we do rollout of any particular program.

Carla Casella - JP Morgan

Okay. And then on the free in-store exchanges, that $29 million this quarter, was that after changing the pricing structure or should we see that number continue to come down?

James W. Keyes

That number probably will continue to change. Remember we put the pricing changes in place during the quarter and so there was a bit of a trend of fact as a result. So you will see continued change.

Carla Casella - JP Morgan

Okay. And then just two store-related questions: one, can you discuss store closures or openings for fourth quarter? And then secondly, of the Movie Gallery stores that are closing, are you noticing that it’s a big number of overlap stores?

James W. Keyes

We have seen some overlap. I’d say probably the majority of the closings that we’ve seen have been in a direct overlap situation. So of course there is some benefit there. In terms of our store openings or closings we are again stepping back and reassessing that asset plan. You won’t see much change for the next couple of quarters in our openings or closings as we try to work with this new approach that we’re taking to the asset and try to get as much learnings as quickly as we can about what we can do to transform the store.

In other words, basically we’ve been closing stores on the basis of purely EBITDA results on a per store basis. The way we’re looking at the stores going forward is more a question of dirt strength and does that store represent incremental opportunity with the different business approach that we are going to take. So you will see still some lease expiration action and things like that. But as far as a proactive plan to close additional poor performers, we’re going to step back for a bit until we can reassess the business model.

Carla Casella - JP Morgan

Can you say at this point what percentage of the stores are unprofitable?

James W. Keyes

We can’t. I don’t think we’ve disclosed in the past. We had taken an action - I believe it was just prior to the close of the second quarter - to announce some 250 closures or something like that. Those were primarily the unprofitable stores that that action was taken on. Since then, our effort has been now to continue to assess dirt strength but also to step back from the business model and try to redefine what the stores could produce rather than what they had produced historically.


Your next question is from the line of Tony Wible - Citigroup.

Tony Wible - Citigroup

I was hoping we could start off by just looking at some of the macro trends. If we looked at the online rental industry this quarter on a net basis it looks like the ads actually struck while the domestic same-store sales for you guys is actually up positive, which I think that is an inflection point. Would you say that that is more of a sign that we’re seeing more maturity in the online or do you think that’s more a function of just your marketing spend?

James W. Keyes

You know that is precisely why we decided last quarter to step back. We think it’s going to take a couple of quarters to really assess what will be happening in this channel shift that we’ve seen for the last year or two. And by us for the last three quarters so aggressively promoting the by-mail channel, we believe we were driving a lot of that incremental business.

Stepping back from it now gives us an opportunity for one or two quarters to really assess how much of that demand will shift or has already shifted to the by-mail channel, which we think will continue to be an important convenience offering for our customers and one certainly that we want to participate in.

So I think to quickly answer your question, it’s too early to tell. I think the next couple of quarters will be very important to us, but as you have heard as I went through our various strategies, we are even more optimistic and aggressive now in pursuing our in-store opportunities and our future penetration of digital opportunities.

Tony Wible - Citigroup

Could you speak specifically about your marketing plans for the later part of the fourth quarter and into 2008? Do you anticipate an ad campaign that would be targeted more towards one or the other, either in-store or Total Access?

James W. Keyes

I think what you will see is more of our marketing efforts try to capture the Total membership. In other words, as I mentioned Total Access really is a wonderful platform for us to build on, but our early focus of Total Access was more channel-directed. It was aimed at that by-mail subscriber.

As we realized how popular the crossover was, where by-mail subscribers were, the majority of them were utilizing the in-store exchange capability, we recognized that our Total membership platform really is the advantage of Blockbuster and going forward you will see us put our marketing efforts more toward overall members and leveraging the flexibility of those members to access their most convenient method of access to media via either in-store, by-mail or even online.

Tony Wible - Citigroup

Only a couple more questions here. I guess if you could comment on just your comfort level with the current covenants that are out there?

Thomas M. Casey

As I was going through the discussion of results, we reiterate what we said at end of the second quarter with respect to our comfort.

Tony Wible - Citigroup

And as far as the new store formats go and your comments on outsourcing, would you consider partnering for getting some of the new store formats that you proposed or are you looking to invest on your own into those new formats?

James W. Keyes

I think you will see a little of both. We are going to be experimenting in a lot of different ways with different formats and potentially with different alliance partners. There are merits associated with both directions and until we actually get some stores in place we won’t know which of those paths will be the preferred. So you will see a little of both.


Your next question is from the line of Barton Crockett - JP Morgan.

Barton Crockett - JP Morgan

I wanted to follow up on the covenant discussion first. I know you guys aren’t guiding very specifically but you are saying that you are comfortable with the covenants of $165 million in the last 12 months for the full year. Because there is so much uncertainty about what rental really is going to be in any given quarter and since you obviously do have a better view on what you’re going to do in G&A and advertising spending, can you give us a sense of what kind of range of gross profit you’d need to deliver to get you in compliance with the covenant, and if you believe you would have any flexibility to negotiate any exemptions there if you needed to?

James W. Keyes

We’re not going to get into detail on the elements of our financial outlook going forward. I can tell you, though, that both the third quarter and the fourth quarter our level of comfort that Tom reiterated was based on that balance between the spending that we had been doing and the opportunity to continue to generate profits from our core business.

And so what we have tried to do is to manage more effectively that balance. In the second quarter we were very aggressively spending on a growth plan, as you know, that we modified. Going forward I’d say rather than going to gross profit percent or even revenue growth, our comfort for both the third quarter and now looking forward to the fourth quarter is really more dictated by the confidence that we have that we can dial up or down our level of growth spending going forward.

Barton Crockett - JP Morgan

You mentioned something about international licensing opportunities. I was wondering if you could you elaborate there. It sounds like what you were saying if I recall correctly was you see opportunities to maybe exit some markets with your company-owned stores and replace those with franchisees. But I didn’t get a sense of the timing or the magnitude of what you are looking at. You guys have a substantial international operation so I was wondering if you could give us a bit more detail on the timing and the magnitude of the opportunities that you see there?

James W. Keyes

Well I’d like to give you more specifics but we are in the process of completing that assessment now country–by-country, going through the relative strengths and weaknesses of each individual market and trying to assess possible partners for licensing. The key to licensing as I have discovered in past experiences, finding that right partner that can give you the brand presence and growth opportunity in any given market place.

So we will be telling you more here in the next two quarters about specifics around some of those country plans. But for now all I can say is that we’re assessing every market that we’re in as a potential candidate outside of North America. North America I can say we do plan to stay for now with a direct operation but outside of North America we will be assessing country-by-country those plans and bringing you more information about it going forward.


Your next question is from the line of Stacey Widlitz - Pali Research.

Stacey Widlitz - Pali Research

You mentioned in stock, what kind of opportunity do you think there is? In other words, what percentage of customers do you think are walking out with nothing, disappointed? And then also, can you talk a little bit about the retail business and how your competitive stance will be going into holiday? Will you match prices from discounters? What will your stance be going forward on that?

James W. Keyes

Sure. Well I’ll preface my remarks by saying I am an old retailer and I am horrified by out-of-stocks in any format. And so when I look at our industry, I’ve always been as a customer surprised that we have so few of the top releases on the shelf. This is not unique to Blockbuster; it’s pretty consistent across at least the physical distribution channels of video rental in the past. And as a customer I found it very annoying.

Now I’m in a position to do something about it. I’m finding it’s not as easy to fix because the supply chain issues are significant. The way product gets to market; the cost structure; whether it’s revenue share or a straight-up purchase, etcetera, needs to be addressed.

What we’ve found internally is that we complicated this matter ourselves when we embarked on programs like Total Access that provided free exchange. You can imagine where the free exchange customers went. They went straight to the wall for the top new releases which put further pressure on our in stock position. I can tell you it is unsatisfactory today. We see that as a great opportunity to restore the relevance of our business proposition in-store.

If you think about the window of opportunity that we have relative to other channels, there has been a lot of discussion about perhaps those windows narrowing or closing someday. One could argue we are not taking advantage of that window today unless we’re in stock. Because if you do want one of those releases you have to be able to rely on Blockbuster to be able to be in stock on those releases during the first two or three weeks of their release to the market place. So to me it represents one of the most significant opportunities that we have in returning to the fundamentals of our core business.

The second question you had was relative to retail and will we be more aggressive in matching the prices on the street for our competitors. The simple answer is no, you’re not likely to see us being more aggressive on retail pricing. We believe that the opportunity that Blockbuster represents is convenient access to media entertainment. And convenience represents hopefully a value to our customers that goes beyond just a pure price play.

Yes, customers can always buy a DVD cheaper at Wal-Mart or maybe even Best Buy, but the question is will they be willing to pay a little more for the convenience of purchasing it when they are already in a Blockbuster store.

A great example that I can give you is Shrek 3 that will be coming up for the holiday season. Normally we would have loaded in the stores somewhere between 10 and 20 copies. We will be putting many more copies at retail into the stores. We probably will charge a premium to some of the other retailers in the marketplace who may be even using this product as a loss leader. But we do believe that the purchase of a product of a title like Shrek is likely to have 80% retail versus about 20% rental.

In the past we haven’t taken advantage of that retail opportunity and that translated into an opportunity cost at the store for the first three weeks of the release. This year we will be out there more proactively retailing Shrek 3 and hoping that the customer is willing to pay a convenience premium for the availability of that title.


Your final question is from the line of Marla Backer - Research Associates.

Marla Backer - Research Associates

Good morning. I wanted to follow up on the discussion that we were just having about retail and pricing. So I apologize if I missed it but you talked before about Transformers as an example. Can you tell us what the price point on Transformers was?

James W. Keyes

We tested various price points for Transformers, I believe they were in the range of $19.99 to $21.99. The purpose of that was to try to get a better understanding of the elasticity model surrounding retail. Candidly we haven’t been very effective in retail in the past and so much of this move into the retail space is an experiment to determine how much elasticity really is there, how much demand there will be, how many copies we can support in each store and managing that inventory balance correctly, etcetera. There is a little bit of trial and error for the first few quarters as we try to learn more and more about that space.

Marla Backer - Research Associates

I know that some of the other retailers, the Best Buys as you mentioned, Wal-Marts, do special promotional packaging on those titles like the Shreks. Would that be something that you would consider doing, a special package just targeted for the Blockbuster venue?

James W. Keyes

It is an opportunity. I can’t give you any specifics around plans that we have, but you will see us working on more exclusive arrangements to find unique packaging, unique product available at Blockbuster and leveraging our scale. We are one of the largest in the business and we do have this advantage of 2 million customers a day through our stores. If we can leverage that traffic and be a better partner of the studios, and frankly I’m not sure they saw us as the best retail partner in the past. But we think we can better partner with them to help on theatrical release and that in turn, that will also help us in the stores. So more to come on that.

Marla Backer - Research Associates

And then my last question is along that same line of exclusivity from studios. You talked earlier about the Weinstein relationship. But it is my understanding that the Weinstein titles are pretty widely available in other rental venues. So how successful would you really say that that promotional campaign has been, to have quote-unquote exclusive access to the Weinstein titles and would you consider trying to get other exclusive relationships such as that one?

James W. Keyes

The Weinstein program was somewhat unique in our industry. And we have learned a lot. They and we have learned a lot about that relationship and continue to refine it going forward. I think as with any industry you’re going to find diverting, you will find competitors doing anything that they can do to get access to product that is not otherwise available and so it’s not s surprise that that is the case here. But it is also manageable and going forward I think you’ll find that what we will use, what we’ve learned with that relationship to help improve it going forward and to continue to make that a stronger point of differentiation for Blockbuster.


Ms. Torres, are there any final remarks?

Angelika Torres


James W. Keyes

We just appreciate everyone’s continued support. We know that we are in a period of transition here. Hope you will bear with us as we continue to transform the business but we will try to be as transparent as possible going forward in terms of both the strategies and eventually providing a little more clarity around some of the financial benefits that we hope to gain as we transform the business. So thank you very much for your continued support and we look forward to sharing with you more to come.

Angelika Torres

Thank you. If you want to, give me a call if you have any follow-up questions.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Source: Blockbuster Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts