When I coveredBlockbuster (NYSE:BBI) some weeks back, I asked, "If Viacom (NYSE:VIAB) is set to spin off Blockbuster because of poor growth and profit prospects, should investors even be interested?" Because details of the special dividend have not been disclosed, the question still holds, but Blockbuster's business environment is showing some improvement.

First-quarter results, however, did not impress. Sales decreased 1% and net income slipped 6% (excluding a $37.1 million settlement from a federal income tax audit). The company even guided investors to look for a 10% decrease in net earnings from 2003.

But for improvement, look first at capital spending, which is jumping to $280 million in 2004 from $176.8 million in 2003. That increase, along with the spending required to launch new initiatives, are key contributors to the lower earnings.

More importantly, shareholders will get for that money new rental subscription (both in-store and online) and movie trading businesses, as well as an expansion of the store-in-store game concept. It is welcome to see the company working on multiple projects to grow the business.

Look for more good news in gross margins, which increased 3.9%. In my experience, increasing margins are rarely the sign of a company headed for failure.

The third and most unlikely place to look for positives is in the direction of hotshot and former Motley Fool Stock Advisor pick Netflix (NASDAQ:NFLX). Netflix will be increasing its monthly fees by 10% in June. Details of Blockbuster's new subscription service are not available, but higher Netflix pricing will certainly help Blockbuster position its own product.

As for competition, an executive-led buyout of Hollywood Entertainment (NASDAQ:HLYW) will do nothing to improve that outfit's offerings. Nor has Wal-Mart (NYSE:WMT) proven to be a major competitor with its video-by-mail service. MovieLink, a joint venture of major studios including Time Warner (NYSE:TWX), has yet to make downloading over broadband a competitive threat, and the same can be said for Disney's (NYSE:DIS) MovieBeam's in-home service.

And yet it's the perceived competition and general uncertainty that has kept a lid on Blockbuster shares. While the S&P 500 has gained almost 21% over the last 52 weeks, Blockbuster is down 1.3% and trades at just 13 times forward earnings.

It might be early to take the plunge, but with rising margins and multiple growth opportunities, Blockbuster is starting to look tempting. I'll be watching.

Fool contributor W.D. Crotty owns stock in Disney -- and stopped making trips to Blockbuster months ago by getting a membership to Netflix.

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