Shares of movie rental giant Blockbuster (NYSE:BBI) dipped 10% today after the company reported strong profits, but on weakening sales.
For the third quarter, net income jumped 25% to $63.7 million, or $0.35 per share, beating the analyst consensus by three cents. But revenue declined slightly to $1.38 billion, as same store sales dropped a hefty 7.5%. A decline in rental revenues was offset by retail sales picked up through last year's purchase of U.K.-based Gamestation.
Blockbuster's stronger profits reflect the company's cost-cutting program, as gross margins improved five percentage points to 63%. Net cash flows from operations were up an impressive 38.5% to $362.2 million on zero revenue growth.
While Blockbuster faces stiff competition from Wal-Mart (NYSE:WMT) and Netflix (NASDAQ:NFLX), it's not clear whether the loss of rental revenue implies a loss in market share. Blockbuster attributed the decline to a focus on higher-margin products, but Netflix's report last week suggests the upstart is making headway.
Interestingly, Blockbuster generated $111.6 million in free cash flow after cutting down rental library purchases, reversing a $64.2 million outflow last year. But just as interestingly, the company dropped its full-year revenue forecast to mid single-digit growth.
From a cash flow standpoint, Blockbuster had an outstanding quarter. But just as assuredly, the loss of rental revenues may be a sign of competitive weakness, which may get played out in the coming quarters.
Netflix was chosen by David Gardner in the June issue of Motley Fool Stock Advisor . Jeff Hwang can be reached at [email protected].
