Despite reporting a narrowing loss on its operations, video rental giant Blockbuster (NYSE:BBI) is slowly unraveling as it faces increasing pressure from creditors, competition, and the loss of revenue streams. The company has begun hinting that it might even need bankruptcy protection. While Foolish contributor Rick Munarriz holds out hope that the leading movie-rental chain will be able to reclaim its star power, it looks to me like the company is really just getting dressed for its own funeral.
Blockbuster posted a loss of $491 million, or $2.61 per share, as revenues fell 2% to $1.39 billion, a shade below analyst expectations of $1.41 billion. While rental revenues were actually up 11% for the quarter, reflecting the price increase the company instituted earlier this year, the company was socked by the loss of $117 million in late fees that it gave up to entice customers to keep coming back. Yet even that did not work; same-store sales fell nearly 4% from last year. Perhaps that's because customers were confused about whether they actually had to pay late fees or not.
Last year, the company launched an ill-fated promotion that seemed to do away with late fees, but really didn't. That led the company to abandon the surcharge altogether -- but among the company's 1,800 franchised stores, only 475 agreed to participate in the no-late fee program. Customers enjoying an extended movie viewing might be surprised to find they have to pay a late fee after all.
The movie maven's competition is also getting more fierce, and not just from online rental king Netflix (NASDAQ:NFLX), a Motley Fool Stock Advisor selection that continues to reel in sales and members. Blockbuster faces challenges from personal video recorders from Stock Advisor pick TiVo (NASDAQ:TIVO), video-on-demand from cable operators, and even McDonald's (NYSE:MCD), which is offering DVD rentals from kiosks located in their restaurants for just $0.99 each. Customers can also purchase low-cost movies through mass marketers like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY), or Circuit City (NYSE:CC).
The rental industry has also been suffering from a double-digit decline caused by a lack of, um, blockbuster movies. According to the entertainment industry research firm Rentrak, domestic in-store and online home video rentals fell 11.7% for the quarter. That's nearly four times greater than the 3% slump experienced from 2000 to 2004.
Even worse, Blockbuster is saddled with excessive amounts of debt, which limits its ability to change reels swiftly. Lenders and creditors eyeballing its $1.3 billion of debt are demanding stricter terms as they become increasingly concerned about the company's ability to finance its obligations. To lower its debt and help stave off bankruptcy, Blockbuster entered into a $150 million preferred stock offering. That's essential, since the credit agreement amendment it received provides debt relief through 2007, but only if the company gets at least $100 million from the stock offering.
These are not the maneuvers of a thriving company, or even one adjusting to a changing economic climate. Mismanaged programs, stalled membership levels, bleeding revenues, and hat-in-hand begging for credit terms are symptoms of a floundering enterprise. Blockbuster is not getting ready to shake, rattle, and roll. Instead, it's simply caught up in a death rattle.
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Fool contributor Rich Duprey owns shares of Wal-Mart, but does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
