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Blockbuster Swings to Slim Profit as Sales Grow 6.3%

The video chain says costs rose in the quarter amid the launch of its Internet rental service.

March 10, 2005|Lorenza Munoz | Times Staff Writer

Blockbuster Inc., the struggling video rental giant, on Wednesday reported a slim $900,000 profit, or break-even on a per-share basis, for the fourth quarter ended Dec. 31.

Blockbuster's results were better than Wall Street expected, and contrasted with a loss of $1.19 billion, or $6.57 a share, a year earlier because of large accounting adjustments. Revenue increased 6.3% to $1.72 billion.

Nonetheless, Blockbuster's operating profit fell 63% because of higher expenses to launch its Internet rental service and other marketing activities. The company also said it would restate certain past financial results to correct lease accounting errors.

For 2004, Blockbuster's loss widened to $1.26 billion, or $6.93 a share, from a loss of $983.9 million, or $5.46, a year earlier. Revenue rose 2.4% to $6.05 billion.

The results come as Dallas-based Blockbuster is under fire for its marketing campaign in which it declares it has ended late fees on its DVD rentals.

Attorneys general in 37 states have created a task force to look into the issue in response to complaints that Blockbuster's campaign is misleading because the chain makes customers buy videos they don't return within a grace period and also charges a restocking fee. New Jersey officials are suing the company over the issue.

Chief Executive John Antioco said in an interview that Blockbuster would work with state prosecutors to address their concerns.

"Some people think we can make [the advertising campaign] clearer," he said. "We are implementing some in-store things that will do that. The more people understand it, the more they will like it and come to us more often." Antioco said Blockbuster already was seeing revenue for DVD rentals significantly increase from last year.

He added that the company would more than double -- to $120 million -- the money it spent last year on promotions and incentives to increase its online rental subscriptions as it seeks to compete with industry leader Netflix Inc. Blockbuster is under siege from rivals such as Netflix, as well as from retailers such as Wal-Mart Stores Inc. and Best Buy Inc. that sell DVDs at discount prices.

Blockbuster's disclosure that it is spending significantly more on promotions brought a mixed reaction from analysts.

"Once the added costs from the new initiatives begin to decline and rentals grow ... they are very well positioned to see tremendous expansion in their operating cash flow," said Marla S. Backer, an analyst with Research Associates.

But Anthony DiClemente, an entertainment analyst with Lehman Bros., said Blockbuster was blowing through cash without any assurance that it would pay off. "They are a spending a lot of money and they are taking bets that they will be profitable by late '05 or early '06," he said. "I think that is risky."

Separately, Blockbuster extended its unsolicited bid for Wilsonville, Ore.-based Hollywood Entertainment Corp. from Friday to March 24.

The Federal Trade Commission is evaluating whether a Blockbuster-Hollywood Entertainment merger would violate antitrust laws. A decision is expected by March 21.

Blockbuster shares rose 72 cents Wednesday to $9.44 on the New York Stock Exchange.

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