Is Blockbuster the Next Circuit City?

Circuit City, once a well-known retail fixture, is no more. Last week, I asked whether bookseller Borders (NYSE: BGP  ) was the next Circuit City. (According to 61% of Foolish readers who responded to our poll, the answer's a resounding "yes.") This week, let's take a look at another possible contender for such a woeful demise: movie-rental giant Blockbuster (NYSE: BBI  ) .

Every day on my way to and from Fool HQ, I see a local Blockbuster store strewn with sale signs -- because it's closing. That's testament to news that my Foolish colleague Rick Munarriz recently covered: Blockbuster plans to shutter many of its bricks-and-mortar stores, replacing them with automated kiosks.

That's no surprise, though, is it? Rivals such as Netflix (Nasdaq: NFLX  ) , Coinstar's (Nasdaq: CSTR  ) RedBox, Apple (Nasdaq: AAPL  ) , and Amazon.com (Nasdaq: AMZN  ) all compete with Blockbuster in one way or another. The old weekend back-and-forth trips to the video store seem like part of the distant past, given all the far more convenient options consumers have these days.

Furthermore, Blockbuster has serious financial issues to contend with. Let's look at a few of its financial metrics, compared to those of its closest rivals:

Company Name

TTM Revenue Growth/(Loss)

TTM Profit/(Loss) per share

Debt/Equity Ratio

Quick Ratio

Blockbuster

(17.5%)

($2.56)

407%

0.2

Netflix

21.3%

$1.81

17%

0.8

Coinstar

79.1%

$1.83

121%

0.4

*All data from Capital IQ, a unit of Standard & Poor's. TTM = trailing 12 months.

Blockbuster certainly looks like the most frightening of the three, with its major drop in revenue and its loss of $2.56 per share in the last year. Its debt-to-equity ratio of more than 400% should be shelved in the "Horror" section, too. A quick ratio below 1.0 can be a red flag, particularly if a company's sales and profit margins are suffering mightily, and especially if it may have to deeply discount prices to clear out its inventories.

That said, Coinstar looks a little scary, too, with a high debt-to-equity ratio and a quick ratio under 1.0. But its revenue is rising impressively, and it's still profitable, both of which could help defang investors' fears.

As the numbers prove, Blockbuster is a risky stock right now. Investors shouldn't be fooled into thinking it's a "cheap" investment because of its penny stock status. The former industry leader may be well on its way to becoming as obsolete as Circuit City, as it tries to evolve in an rapidly changing industry beset by disruptive influences like digital delivery. Worse yet, its precarious financial position makes any efforts to keep up with its rivals all the more challenging.

Add in a difficult macroeconomic climate with high unemployment, and fretful, budget-minded consumers, and Blockbuster could face its final curtain call very soon.

On a more positive note, the chart above might make you envious of Netflix shareholders. A stock trading at 34 times earnings might not look particularly cheap, but the discs-by-mail mogul boasts solid revenue growth, a nice profit, and a far-from-worrisome amount of debt. That's hardly the image of a company facing impending doom. 

If only poor Blockbuster could say the same.

Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy is kind, and rewinds.


Read/Post Comments (16) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2009, at 4:43 PM, catoismymotor wrote:

    Ayn Rand was one of my managers when I worked for Blockbuster. Yeah, that's the ticket.

  • Report this Comment On November 18, 2009, at 6:48 PM, TMFLomax wrote:

    Cato I just about choked on my soda when I read that....

  • Report this Comment On November 18, 2009, at 7:18 PM, morrisville wrote:

    Has anybody else ever tried Netflix. What a scam. You set up an account and the first thing they do is mail you THEIR choice of video's -- old stuff. And if that doesn't tee you off, wait'll you get the new release video you ordered (after two or three weeks wait) -- I guarantee it will jerk and skip to distraction. And wait'll you try to complain to somebody -- just try to find somebody, anybody. The ONLY thing that could save Netflix is digital downloads -- how can they screw that up. By contrast, Blockbuster has a wonderful combo service, you join their video's by mail, get your video, view it, then swap it at the store for their newest release. Like they say, you can't fool all of the people all of the time ... unless you're Netflix. I hate 'em, but I bought their stock anyway! So go, go Netflix. Make me profits (that I can spend at Blockbuster).

  • Report this Comment On November 18, 2009, at 7:48 PM, moooooser wrote:

    I'm yet to have an issue with a single Netflix disk after a year and a half. Compare that to Blockbuster making >80% of their profits off of late fees. Blockbuster actually threatened to send me to collections for not returning a disk I found on their shelves that had been rented multiple times since I returned it. So customer service is anecdotal, but I suspect on average Netflix is continuing to do something right since it's customer base increases every month and Blockbuster's customer base dwindles. My money is literally in Netflix stock.

  • Report this Comment On November 18, 2009, at 8:08 PM, rett448 wrote:

    I have been a netflicks member for about 5 years, and i have recieved maybe 3 damaged disks. There selection is unbelievable and the shipping time is about 1 day for me. However I do think their stock is currently over valued. Their digital streaming service is great for stanard definition but the HD service is being held back by the lack of true high speed internet

  • Report this Comment On November 18, 2009, at 9:15 PM, gvc40 wrote:

    The dollars value is directly proportional to the competence of the congress and president to make wise financial decisions. Surprisingly, BIll Clinton and the Newt Gingrich Republicans can claim the high ground. They made the tough choices either through tax increases or spending cuts to bring a balance budget and high dollar value. George Bush and the Rep Congress managed no only to spend like drunken sailors and the dollar dropped. Some MBA from Yale?? NO guts to make tough choices.

  • Report this Comment On November 19, 2009, at 1:37 AM, depsee wrote:

    I think a next Circuit City possibility could be Sears. I commented earlier this year about that after observing ghost town parking lots at various Sears stores and reading comments about the same situation in other parts of the country. The last time I drove by a Sears and paid attention, I would say business is still not good. Also, I don't even know if Kentucky Fried Chicken is a publicly traded company or owned by one, but I have heard that most of the ones in the county where I live are going to shut down soon. May be only a local problem but did come across something on the internet recently where a KFC manager was saying they can't afford to pay the employees the hours they are supposed to work. I don't know where this person was located. That, along with where I live may be isolated situations. But I would say "Where There Is Smoke, There Is Fire".

  • Report this Comment On November 19, 2009, at 9:21 AM, mikecart1 wrote:

    The Blockbuster next to my work closed this week. Last week they had "5 Days Until Close, everything $3.99 or lower". I thought they were joking. I wanted to stop in a grab a bunch of DVD's for my car trips. They weren't joking. This past Monday, the sign and everything were gone.

    :(

  • Report this Comment On November 19, 2009, at 9:43 AM, TMFLomax wrote:

    Thanks for the comments everyone!

    mikecart1, nope, they sure weren't joking huh. It is kind of sad to see something like that. But last night I was thinking about this again, and... well, for a very long time Blockbuster did stand pretty comfortably in its position and arguably abused customers with its late-fee policies, I know a lot of people weren't too happy with that stuff, so then Netflix came along and disrupted "the way things were." It's sad in a nostalgic way but definitely a lesson about how things can go if the proper evolution doesn't take place...

    mikehadad, I agree that Sears is a good contender for a deeper look along these lines, I haven't looked at it closely in a while. But yeah, it has been very difficult for it to compete against Wal-Mart, Target, etc... (Oh, and KFC is owned by Yum! Brands...)

  • Report this Comment On November 19, 2009, at 11:41 AM, mschmalf wrote:

    I'm sure there are differences in service to some degree based on where you live. I have had no real issues since becoming a member in March 2000. Movie turaround is very fast, new releases aren't too hard to get when they first come out and I have had very few broken or unplayable discs. The streaming content to computers, XBox 360 and (soon) PS3 as well as some TVs make Netflix very strong in my opinion.

  • Report this Comment On November 19, 2009, at 7:30 PM, Sorni wrote:

    I'm hanging in there with Blockbuster (as a customer, not invester). For 13 bucks a month (including tax), I see a boatload of movies thanks to the in-store exchanges. Know it won't last forever, but I'm sticking around till the bitter end.

    As for the stock, I've owned it numerous times and made a little money. Enough to pay for my yearly membership dues, anyway.

    Hope they find a model that works well enough to keep 'em in biz...

  • Report this Comment On November 20, 2009, at 12:42 AM, NOaverageJOE wrote:

    moooooser, you may have very well found a disc on the shelf that you were charged for, but don't make up stuff about others renting said disc out, because that isn't possible with the Blockbuster computer system. Just clarifying that to you and other readers as a six year Blockbuster employee.

    With that said, I feel we're in danger but only because Blockbuster is under annual leases with the majority in plazas. The owner of these plazas raise rent every year, especially if a competitor is out to buy the space. In my store's case, Wal-Mart has offered to purchase the entire plaza. Instead of complying, the owner is making the most of it by jacking up the leases until nobody will stay. Blockbuster doesn't have a good system for this and is finding it easier to simply close stores than relocate. Our rent is $14,000 A MONTH! All of these other rental services don't have to pay for a storefront and that's why they're successful. Blockbuster has evolved quite a bit, but rentals have never been that profitable ever since rentals and retail were released the same day. Also, retail DVDs are much cheaper than VHS were in Blockbuster's heyday. Last but not least, people are looking for the most convenient option whether its streaming at home or in a kiosk at the market. The general public doesn't care about variety and thousands of movies in one place. They want the new movies (no matter how bad they are) just so they can talk to their friends about them. Blockbuster would do a lot better if they didn't pay for the other 80% that can't make money back through rentals. Only the true movie fans care to watch non-mainstream movies and those people are rare.

  • Report this Comment On November 20, 2009, at 12:43 AM, NOaverageJOE wrote:

    moooooser, you may have very well found a disc on the shelf that you were charged for, but don't make up stuff about others renting said disc out, because that isn't possible with the Blockbuster computer system. Just clarifying that to you and other readers as a six year Blockbuster employee.

    With that said, I feel we're in danger but only because Blockbuster is under annual leases with the majority in plazas. The owner of these plazas raise rent every year, especially if a competitor is out to buy the space. In my store's case, Wal-Mart has offered to purchase the entire plaza. Instead of complying, the owner is making the most of it by jacking up the leases until nobody will stay. Blockbuster doesn't have a good system for this and is finding it easier to simply close stores than relocate. Our rent is $14,000 A MONTH! All of these other rental services don't have to pay for a storefront and that's why they're successful. Blockbuster has evolved quite a bit, but rentals have never been that profitable ever since rentals and retail were released the same day. Also, retail DVDs are much cheaper than VHS were in Blockbuster's heyday. Last but not least, people are looking for the most convenient option whether its streaming at home or in a kiosk at the market. The general public doesn't care about variety and thousands of movies in one place. They want the new movies (no matter how bad they are) just so they can talk to their friends about them. Blockbuster would do a lot better if they didn't pay for the other 80% that can't make money back through rentals. Only the true movie fans care to watch non-mainstream movies and those people are rare.

  • Report this Comment On November 20, 2009, at 1:17 PM, WunMoshen wrote:

    First I would like to say: Hello to everyone and this my first time posting a comment on Motley Fools. Its very rare I post at all. But this article and many of the comments made where intresting where as some damanded a rebuttle. so here we go.

    morrisville wrote: Has anybody else ever tried Netflix. What a scam. You set up an account and the first thing they do is mail you THEIR choice of video's -- old stuff. And if that doesn't tee you off, wait'll you get the new release video you ordered (after two or three weeks wait) -- I guarantee it will jerk and skip to distraction. And wait'll you try to complain to somebody -- just try to find somebody, anybody. The ONLY thing that could save Netflix is digital downloads -- how can they screw that up. By contrast, Blockbuster has a wonderful combo service, you join their video's by mail, get your video, view it, then swap it at the store for their newest release. Like they say, you can't fool all of the people all of the time ... unless you're Netflix. I hate 'em, but I bought their stock anyway! So go, go Netflix. Make me profits (that I can spend at Blockbuster).

    Ok, Im sorry if you had bad experience with Netflix. Im a loyal customer and a pretty good judge of character and business. I dont see how its a scam to get as many movies as you can for one price (without the late fee) a month along with streaming content.

    Netflix has never sent me anything other than what I have selected from the website, they have mad suggestions based on my current and past movie selection and thats it. The customer service is even excellent. Both phone and online. A disc was lost through the mail all it took was a 5 minute call to netflix without even waiting for a manager to give them netflix representive instructions. 2 yrs ago I accidently misplaced a disc and they told me "not to worry just continue on making your selection" blockbuster wouldve sent me a bill for more than what the movie is worth.

    And as for this statement: " the ONLY thing that could save Netflix is digital downloads -- how can they screw that up." LOL @ that, heres the crazy part Netflix is not the one in debt or closing stores (warehouses in netflix case) before Netflix was offering streamed videos (as you call it Digital Downloads) they was already a threat to

    Blockbuster because Netflixes prices and the convience of movie rental by mail.

    Now I have a samsung Blu-Ray player that has netflix and blockbusters movie streaming interface, meaning

    me and my fiance can watch movies from either company. So heres my opinion on Blockbuster, I believe Blockbuster can succeed because the movies available for streaming are more current than netflixes streaming selections but Blockbuster CHARGE for individual movies that are streamed to your home for 3.99 you better off going to a Redbox vending machine and getting the movie for 1.00$ now if they can match Netflix as far as the streaming thing goes along with the other little ammenties that goes with your Blockbuster membership then maybe Blockbuster can once again become the top dog its once was. Oh and you bought the stock because you believe in them, If Netflix treated customers as bad as you said then the whole rental by mail would be a failure or close to it for them. Im sorry for the long posting please dont ridicule me and take anything I said personal Im just believe in good business ethics and being fair. Thank you in advance.

  • Report this Comment On November 20, 2009, at 2:05 PM, WunMoshen wrote:

    I posted something earlier and for some reason its not displayed. Im going to attempt to make my point again.

    Im posting as a fellow investor and consumer

    I dont understand how anyone could consider Netflix a scam. Netflix has never sent me any movies other than the ones I selected on there website. The only thing Netflix has done is suggest movies to me based off my current and pass movie slection. There customer service and movie turn around time is excellent.

    morrisville wrote: "The ONLY thing that could save Netflix is digital downloads -- how can they screw that up."

    That statement is funny, whats even funnier is the fact Netflix has yet to announce they will be shutting down shipping warehouses. Even before they started to offer the streaming services (as morrisville call it "Digital Downloads"), Netflix was considered a threat to Blockbuster. One word describes why. "Convience" If someone can make it where you never have to go as far as your mailbox to take a DVD rental back and give you the chance to watch as many movies as you want for a price such as 8.99 or 14.99 a month without fears of pending late fee's what would you do? Remain a skeptic, or give them a try?

    As for Blockbuster surviving, I believe they have a chance but going the direction they are going right now will lead to failure. I own a Samsung Blu Ray DVD player with Netflix and Blockbuster streaming capablilities. So me and my fiance have the option of watching streamed content from either Blockbuster or Netflix. Now heres where the success or failure comes into play, Unlimited streaming comes free with your Netflix account. Blockbuster has an advantage not just because they also offer movies that can be streamed but they have a more current selection available to be streamed right to your home (for example: Transformers 2 can be streamed from Blockbuster not Netflix) but the movies they (Blockbuster) have available for streaming are priced at 3.99 per movie you might aswell run to a Redbox machine and rent Transformer 2 for .99 plus tax

    I believe if they add the streaming part to their membership; and if not unlimited streaming, then limit the amount of streaming time to customers along with the ammenties already offered with the membership, they can succeed and climb out of the financial rut they are in.

    Thats my opinion and Im sticking with it. Sorry for the long post please dont ridcule me or take what I said personal I was am not biased towards Blockbuster Im just a fan of great customer svc and excellent business ethics.

    Thank you.

  • Report this Comment On November 24, 2009, at 2:47 PM, TMFLomax wrote:

    Hello WunMoshen, welcome to the Fool and posting! Thanks for sharing your thoughts on this, it is a very interesting topic.

    Alyce

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