Blockbuster (BBI) beats expectations; sets the stage for heavy investment and operating losses in 2005

Includes: BBI, NFLX
by: David Strahlberg

Blockbuster (ticker: BBI) reported results on March 9, 2005 for
the fourth quarter and year end 2004.  Below are some highlights.

Results 4Q04 vs. 4Q03:

  • EPS: $0.00 vs. $-6.57
  • Adjusted EPS: $0.07 vs. $0.32 (-78%)
  • Consensus EPS was $0.04
  • Revenue: $1,718.9M vs. $1,617.2M (+6%)
  • Consensus revenue was $1,500M
  • Gross profit: $955M vs. $923M (+3%)
  • Gross margin: 55.6% vs. 57.1% (-150bps)
  • Operating income: $22M vs. $(-1,198.8M)
  • Operating margin: 1.3% vs. -74.1%
  • Net income: $0.9M vs. $(1,189.3M)
  • Net margin: 0.1% vs. -73.5%
  • Adjusted Net income: $12.3M vs. $58.0M (-79%)
  • Adjusted Net margin: 0.7% vs. 3.6% (-290 bps)
  • Cash: $330M vs. $233M (+42%)
  • Debt: $1,145M vs. $220M (+420%)
  • Capex: $104.7M vs. $77.4M (+35%)
  • Free cash flow: $88M vs. $203M (-57%)

Guidance 2005:

  • Revenue growth in low-single-digits
  • Elimination of late fee will impact revenues by $250M - $300M in 2005; BBI expects to offset those revenues with increased traffic, fewer promotions and expense management
  • 2005 Operating income will be flat vs. 2004 (not including costs of $50M on 'No Late Fees' promotion and $40M in share based compensation costs)
  • 1Q05 operating income will be impacted by the following costs: $80M form absence of late fees; $60M investment in Blockbuster Online; $50M in 'No Late Fees' promotion; while not stated explicitly by the company, the results in an operating loss of $65M
  • Capex: $150M in 2005 vs. $275M in 2004

Revenue breakdown 4Q04 vs. 4Q03:

  • Rental: $1,147m vs. $1,147M (0%)
  • Merchandising: $546M vs. $444m (+23%)
  • Other: $26M vs. $27M (-4%)

Rental revenues, by product 4Q04 vs. 4Q03:

  • VHS: $119M vs. $293M (-59%)
  • DVD: $889M vs. $706M (+26%)
  • Games: $139M vs. $147M (-5%)

Merchandising revenues, by product 4Q04 vs. 4Q03:

  • VHS: $203M vs. $193M (+5%)
  • DVD: $210M vs. $209M (0%)
  • Game sales: $240M vs. $131M (+83%)
  • Game merchandising: $96M vs. $104M (-8%)

Margin comparison 4Q04 vs. 4Q03:

  • Rental: 70.9% vs. 70.6% (+30bps)
  • Merchandising: 21.1% vs. 19.5% (+160bps)
  • Gross margin: 55.6% vs. 57.1% (-150bps)

Store count 4Q04 vs. 4Q03:

  • U.S.: 4,708 vs. 4,579 (+3%)
  • International: 2,557 vs. 2,526 (+1%)
  • Franchise: 1,829 vs. 1,762 (+4%)
  • Total: 9,094 vs. 8,867 (+3%)

Same store revenue growth 4Q04 vs. 4Q03:

  • U.S.: -1.2% vs. -8.4% (+720bps)
  • International: 2.8% vs. -1.6% (+440bps)
  • Worldwide: 0% vs. -6.8% (+680bps)

Quick comments:

  • New Initiatives:  Spent $260M ($140M capex; $120M operating costs) on new initiatives in 2004; these include include: Blockbuster Online, Movie Pass, Movie & Game trading; Game concepts
  • Blockbuster Online:  subscriber count is 750,000; BBI plans to accelerate its investment in the business in order to reach goal of 2 million subscribers by 1Q06; the company plans to spend $70M in 1Q05 and $120M in 2005 (vs. $50M in 2004); currently have 22 distribution centers, with 8 more coming soon
  • BBI sees Blockbuster Online as a platform for VOD offerings; plan to offer VOD in 2006
  • 'No Late Fees' promotion:  2.1M subscribers at end of 2004; has resulted in transactions increasing and upwards trending member counts for first time in two years
  • Movie & Game trading: launched in 3,500 stores in 2004; sold 14M games and movies; will not require significant investment in 2005
  • Game concepts: 700+ game locations at end of 2004
  • BBI has identified errors with respect to how it accounts for its leases; the company will restate previously stated financial statements; this will not affect cash or cash flows data
  • Advertising expense:  increased to $92.7M (5.4% of revenues) in 4Q04 from $67.2M (4.2% of revenues) in 4Q03
  • The company will no longer provide same-store revenue guidance
  • 2005 Cost cutting: plan to reduce SG&A costs by $70M; reducing capex projection by $30M (from $180M to $150M)
  • Hollywood Entertainment (ticker: HLYW) acquisition: remain committed to acquiring HLYW; reached an agreement with the FTC to extend the waiting period to March 21, 2005
  • Q&A anecdote:  the conference call Q&A can be very telling about the company's relationship with investors and analysts:  BBI took 6 questions during its Q&A session:  the first 2 came from sell-side analysts at Fulcrum Global Partners and Harris Nesbitt, relegating bulge-bracket firm Lehman Brothers to third in the queue
  • Netflix anecdote: Netflix (ticker: NFLX) was not mentioned a single time during the call


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Tagged: Earnings
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