Blockbuster Closes Stores, Makes Money - Duh!

Blockbuster (BBI) reported net income for the first quarter of 2008 was $45.4 million, or $0.20 per diluted share, an improvement of $94.4 million as compared with a net loss of $49.0 million, or $0.27 per share, for the first quarter of 2007 (see earnings call transcript).

Total revenues decreased 5.4% to $1.39 billion for the first quarter of 2008 from $1.47 billion for the first quarter of 2007, as a result of fewer company-operated stores. Domestic same-store revenues increased 2.9% as compared to the first quarter of 2007, reflecting a 920 basis point improvement over the first quarter of 2007. This increase was driven by a 0.4% growth in same-store rental revenues and a 19.7% increase in same-store merchandise sales. International same-store revenues decreased 1.5% from the same period last year, reflecting a 0.9% increase in same-store rental revenues and a 4.9% decline in same-store merchandise sales. Worldwide same-store revenues grew 1.4% from the same period last year.

More importantly, they had a $124.5 million increase in cash flow provided by operating activities for the first quarter of 2008 to a deficit of $19.5 million from a $144.0 million deficit for the first quarter of 2007. Free cash flow (net cash flow used for operating activities less capital expenditures) for the first quarter of 2008 improved by $115.6 million as compared to the same period last year to a negative $39.4 million.

What happened? Essentially domestic same-store sales grew for the first time in five years and total revenue fell because of the decrease in company-owned stores. Rather than having 5 Blockbusters in a town, they decreased it to one and folks still went to the store. It has been just over a year since I first pleaded for blockbuster to "increase the rate of store closures" and I have posted the request countless times.

Now CEO Jim Keyes said, "The significant improvement in our first quarter results demonstrates the underlying strength of our core rental and emerging retail business." I would not go that far, Jim, having less shareholder money go out the door to support poor stores and then having those folks rent from another location will improve your results but it does not necessarily mean the core business is strong. It does mean there is a base of customer and that you may finally be on the right track.

The only problem is, the store rental base will continue to shrink as more folks go online for rentals or turn to the mail for them. Unless Keyes can convert these folks to his mail or kiosk concept, Blockbuster will continue to shrink. Last quarter the mail division subs were at 3.1 million, stable from the previous one. This need to grow, as store rentals will continue to shrink. If it doesn't, it means people are going elswhere.

Blockbuster may finally be on the right track, why on earth would they want to pay for the privilege of taking over Circuit City's (CC) problems now?

Disclosure: No position BBI.