Foolish Forecast: Blockbuster Fights Its Demons

Happy Halloween! There's no better way to get into the holiday spirit than by looking ahead to tomorrow morning's Blockbuster (NYSE: BBI  ) report. Last year, I called this stock a Foolish trick, and that was before things got scary. The last earnings report was a horror story unto itself. Let's see whether the script for the third quarter reads like Major League III or Creepshow III.

What Fools say:
Here's how Blockbuster's CAPS scoring rates against some of its peers and competitors:

Market Cap
(in millions)

Trailing P/E Ratio

CAPS Rating

Hastings Entertainment (NASDAQ:HAST)

$96.4

14.0

-

Blockbuster

$993.4

NA

*

Netflix (NASDAQ:NFLX)

$1,736.2

27.9

**

GameStop (NYSE:GME)

$9,144.9

49.4

*****

Best Buy (NYSE:BBY)

$20,446.0

17.4

***

Data taken from Motley Fool CAPS Oct. 31.

Movie Gallery would normally show up in that table, but the company has gone bankrupt, and the stock has moved to the Pink Sheets. On the bearish side, our players take turns giving Blockbuster five years to live or calling it dead already. Netflix, on-demand services, and Internet downloads make for dark days in Dallas.

But there are a few bull ratings. One of my favorite CAPS commenters hates this company but still thinks it's about to launch a massive turnaround. The change starts at the top, and a new, customer-friendly corporate culture should follow eventually. "With a new focus on actually making the stores popular destinations as is evidenced by their hold on advertising for their [Total Access] service and experts in merchandising at the helm, I see this company doing a 3-year turn around," he says.

What management says:
Blockbuster hasn't handed out official guidance since the summer of 2004, following three quarters in a row of guiding lower and lower.

What management does:
You can see the ghost of the loss-leader Total Access promotion in the declining gross margin of the last two quarters. The trailing figures here mask the magnitude of the drop a bit. That lobster walk had a trickle-down effect on the rest of the income sheet as well, and put a brutal stop to a promising cash flow trend.

Margins

3/06

6/06

9/06

12/06

4/07

7/07

Gross

55.3%

55.5%

55.3%

55.2%

53.8%

52.4%

Operating

1.4%

1.9%

2.0%

1.9%

0.4%

-1.0%

Net

-9.5%

-7.4%

1.1%

1.0%

0.2%

-1.7%

FCF/Revenue

-0.5%

0.9%

3.1%

4.5%

1.1%

0.8%

Y-O-Y Growth

3/06

6/06

9/06

12/06

4/07

7/07

Revenue

-8.3%

-8.7%

-8.8%

-3.5%

-0.1%

0.6%

Data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
New CEO Jim Keyes has done some housecleaning, replacing old Chief Operating Officer Nick Shepherd and Chief Financial Officer Larry Zine in one fell swoop. Zine's replacement, Tom Casey, came from Deutsche Bank, where he managed the megabank's North American retail, food, and convenience store relationships. How's that for a good fit with Blockbuster and Keyes' 7-Eleven background?

Total Access has been repositioned and might even make money now, but it won't pull in new subscribers by the boatload anymore. In fact, I'd be very surprised if the total subscriber count didn't drop a bit from last quarter.

Tomorrow's report should scare the pants off Wall Street when the online subscriber count gets lopped off by the shoulders. But that's a short-term issue, and Keyes may well provide a happy ending in due time.

So today would be a lousy time to buy this stock -- and tomorrow might be great. Spooky or inspiring? That's your call to make, Fool. Just remember Blockbuster HQ's address: 1201 Elm Street, Dallas.

Other Foolish Blockbuster stories:


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