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Strongly believe in Nassim Taleb's theories. Have a strong focus on the market psychology and behavioral finance aspect of equity trading. Prefer longer term trades for best risk/reward profiles. Still believe Buy & Hold strategies can be relevant in the current market.
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  • BBI - A turnaround story? 0 comments
    Dec 12, 2009 3:47 PM | about stocks: BBI, NFLX, NCR, VZ, T, T

    I have been doing research on Blockbuster (BBI) recently and have determined that the company is a buy at current levels. They are a turnaround story that were caught off guard by changes in consumer spending, but their strong brand name and the scale of their business will allow them to correct their mistakes and take market share from CoinStar's Redbox, as well as Netflix.

    Blockbuster is attacking the Redbox model at its own game, and has already inked deals with a large grocer in Florida (Publix) to put a Blockbuster Express Kiosk in every store. With the roll out of 10,000 kiosks by 2010(2,500 in 2009) they only have room to take market share from their competitors. Now that they have decided to replace under-performing stores with the kiosk model, give them credit for doing it big, with the scale to make an immediate impact on operating income since these kiosks require very little overhead costs comparatively.

    BBI's most pressing issue for this fiscal year 2009 has been reducing costs, conserving cash and paying down debt. All of which they have done rather successfully.

    From 10Q on (8-14-2009): "During the first half of 2009, we temporarily changed our strategy to manage the business for cash conservation, not for growth. This temporary business strategy was necessary due to the upcoming debt maturities and challenging market conditions. We completed the funding of our $250 million amended and extended credit facility in May 2009. We believe that our new financing, combined with our cost saving initiatives and anticipated external liquidity enhancements, will improve our overall operational health and financial performance."

    On 10-02-2009:

    "Blockbuster Inc. said Friday that it closed a $675 million debt offering due in 2014, nearly twice as much money as the rental-video chain had hoped to raise as it takes steps to improve its finances."

    * Shows that they were able to not only get their financing in line but raised much more than they had hoped for, a bullish sign that there are some big investors who believe in the story.

    "The Dallas-based company said it remains on track to cut expenses by $200 million this year, with $166 million already reduced in the first half. It will continue to seek ways to boost efficiency, including divesting of non-core assets outside North America."

    * Selling assets outside of America will allow them to continue to raise cash to pay down debt as well as focus on their restructuring of their business model to lower overhead costs while maintaining revenues.

    "Blockbuster has said it may close about 20 percent of its 4,356 U.S. stores by the end of next year and set up 10,000 DVD rental kiosks in the stores of other merchants."

    * This should effectively eliminate the worst brick and mortar performers of all US stores while keeping those who still make money and placing kiosks in strategic places for areas that have revenues but not enough to justify a full store full of overhead.


    Strategic Objectives from their most recent 10Q report:

    Stores —We will focus on improving the customer shopping experience by :

    • working to restructure studio contracts to improve unit availability in the remainder of 2009; and
    • continuing to benefit from the proliferation of Blu-ray.

    By-Mail — We will optimize our by-mail distribution channel by:

    •enhancing our product offering with by-mail game rentals; and
    •benefitting from new multi-channel marketing efforts.Vending —We will pursue this distribution channel through:
    •an alliance with NCR, who plans to deploy over 2,500 kiosks by the end of 2009 and a total of 10,000 kiosks by the middle of 2010; and
    • adding retail DVD product and games to our vending offering. Digital —We have and will continue to expand our digital presence using methods such as:
    •strategic alliances with consumer electronics device manufacturers and infrastructure providers, including:
    • joining forces with Samsung to provide premium digital entertainment via select new Samsung HDTVs, home theater systems and Blu-ray players; and
    • partnering with TiVo ® to provide premium digital movie titles directly to the television set via TiVo DVRs;
    • adding retail Blu-ray, DVD and games to our digital library; and
    • improvements to our blockbuster.com website."

    The push into digital VOD(Video on Demand) as another source of revenue is another way they plan on staying competitive in the constantly changing movie rental environment, and will allow them to increase competition with the VZ, T, and other VOD competitors for those people who wish to order a movie from the comfort of their home.

    In summation, Blockbuster is a victim of slow response to changing consumer behavior, and new technological advances that crippled their old business model. With their new initiatives however, they are fighting back on all fronts to compete with Redbox, Netflix, and Video-on-Demand companies such as Verizon using their scale and strong brand name. With continued initiatives to streamline their business and lower costs, while focusing on convenience for the customer, Blockbuster being priced around $1.00 and in my opinion is in no current fear of going bankrupt, and has much more room to the upside than the down. Their main problem is drastically cutting overhead costs without losing too much of their current strong revenue stream; eliminating inefficiencies in their past model in favor of the low-cost model of kiosks, by-mail rentals, and video on demand. I think this could be a $3.00 - $5.00 issue within a year's time frame if their new business model is a success and they can transform their business using their scale and strong name brand to take advantage of this new world of movie rentals.

    Related Articles:

    Here is a glimpse of the roll out of kiosks in a heavy metropolitan area such as Boston:

    Article on Kiosk Battle with Redbox

    Major Holders

    Disclosure: Long BBI

    Stocks: BBI, NFLX, NCR, VZ, T, T
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