Kuru. It's a fatal disease that comes from eating brains. Apparently a lesser form afflicted a few analysts who happened to view yesterday's earnings report from Blockbuster (NYSE: BBI) and get all giddy over the profits the movie rental purveyor posted.
While I won't say that my Foolish colleague Rick Munarriz succumbed to the laughing sickness associated with kuru, he did appear to be trembling with excitement over the chain's apparent reanimation this quarter. Somehow I thought the report remained a fright fest.
First, though, let's give CEO Jim Keyes his props. The bricks-and-mortar rental relic not only beat analyst profit projections, but did so handily, coming in $0.05 ahead of their best guesses. Moreover, after five years of wandering in the wilderness, customers finally found their way back to a Blockbuster store, and it was able to post positive same-store sales this quarter. Total Access -- its glove-across-the-face challenge to Netflix (Nasdaq: NFLX), which lets customers return movies by mail or to the store -- also turned profitable.
Yet that's about where the good news for Blockbuster ends. Everything else still looked like one of those movies that get stuck in a projector: the picture starts to warp and turns all bubbly and blackened.
Revenue fell 5% from last year and profit margins on rentals were down as well. Instead, Blockbuster saw same-store sales from merchandise soar 19.7% and gross margins on those sales widened by nearly 240 basis points over last year.
Further, although Total Access turned profitable, Keyes also said membership "stabilized" -- read that to mean "stopped growing." So he hopes rentals at kiosks like those that have been successfully launched by Coinstar (Nasdaq: CSTR) and McDonald's (NYSE: MCD) along with digital downloads of movies will be the next thing to resurrect Blockbuster. Considering Netflix already offers subscribers a similar service free of charge and Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) are in the space, too, I wouldn't expect these services to resemble anything but a Bride of Frankenstein of parts hurriedly sewn together to create a monstrous being.
Perhaps most importantly, Blockbuster's $42 million net income -- that vaunted profit it achieved this quarter -- was realized solely because the rental chain slashed its advertising budget by 60%. Even a zombie can turn a profit by gutting essential expenses.
So it had lower revenue and lower profits from its main movie rental business; it was able to juice returns a bit because it sold a few more Snickers bars to folks waiting in line; but to make the whole thing work it had to close down a slew of underperforming stores and tell the ad men to take an extended vacation. Oh, and those positive comps mentioned before? They only managed to squeak 0.4% higher here in the U.S. Hardly a stampede back to the checkout queue.
Yet it still wants to forge ahead and buy a failing electronics retailer for more than $1 billion, which even Circuit City (NYSE: CC) doubts it has the capability of pulling off.
Mwhahaha! Now I'm the one laughing.
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