Blockbuster swings to 1Q profit on US sales growth

Blockbuster Inc. said Thursday it swung to a first-quarter profit on lower expenses and improved domestic sales, bolstering the movie rental company chairman's belief that a turnaround plan is working.

The Dallas-based chain said its earnings after preferred dividends totaled $42.6 million, or 20 cents per share, in the three months ended April 6. That compared with a loss of $51.8 million, or 27 cents per share, a year earlier.

A 2.9 percent increase in same-store sales in the U.S. included a jump of nearly 20 percent in merchandise sales, the sort of revenue the company had in mind when it proposed last month to buy electronics retailer Circuit City Stores Inc.

An initially reluctant Circuit City has hired Goldman Sachs to help negotiate a deal, and Blockbuster Chairman and CEO Jim Keyes said his company hoped to decide within weeks whether a possible marriage is a good idea.

"We will not proceed with the transaction unless it makes sense both strategically and financially," Keyes said in a conference call with analysts. "We remain confident that our core business is healthy, and we feel confident in our ability to transform Blockbuster with or without this transaction."

Keyes, who took over in July, said he was pleased with all three facets of the turnaround plan for a company that lost $4 billion from 2002 to 2005 and lost money again last year after turning a profit in 2006.

"We are more confident than ever that our strategy is working," Keyes said.

The core rental business was boosted by Blockbuster's subscription-based Total Access program being "profitable and positioned for growth", Keyes said. The same-store sales were a sign of retail growth, Keyes said.

The third facet _ developing a digital platform _ will get a test starting in June through a six- to 12-month pilot program for kiosks where customers can download content. However, Keyes said it would be two to three years before "widespread deployment" of such a concept.

"We're ahead of both the technology and the consumer," Keyes said.

Blockbuster's revenue slipped 5 percent to $1.39 billion after closing or selling 412 stores.

Analysts polled by Thomson Financial forecast net income of 15 cents per share on sales of $1.44 billion.

The company trimmed expenses to $632 million, down $100 million from the same period last year, mostly through cuts in advertising spending and a drop in corporate overhead.

Arvind Bhatia, an analyst for Sterne, Agee & Leach, said he was surprised by the strength of the same-store sales. While he expected the online Total Access program to turn a profit this year, Bhatia didn't think it would happen in the first quarter.

"They've made a significant amount of progress since the new management team came on board," Bhatia said. "Your core business is trending correctly and your online business is profitable, (so) it bodes well for the coming 12 to 18 months for the company."

Blockbuster shares fell 2 cents to $3.05 in trading Thursday.

Michael Pachter, an analyst with Wedbush Morgan Securities Inc., said investor skepticism toward a combined Blockbuster and Circuit City kept the stock price from surging on the strong earnings report.