Is this Blockbuster's (NYSE:BBI) last stand? Earlier this month, the movie rental chain talked its creditors into relaxing its debt covenants. Now the company will have to produce only $150 million in earnings before interest, taxes, depreciation, and amortization in the second half of the year. That would normally be considered good news -- like talking a loan shark into giving you another day before he sends his heavies in to take aim at your kneecaps -- but it's a bit more ominous than that.
Blockbuster had to issue some convertible shares to win the reprieve. That move may pad the pocketbooks in the near term, but if the company can right its ship, it could sting stockholders with dilution in the long run. Then again, one has to wonder whether Blockbuster's creditors grew more flexible because they didn't want to force Blockbuster to file for bankruptcy by tightening the screws too hard.
This latest activity came on the heels of yet another horrendous quarter, in which the struggling chain posted another loss on a dip in sales. An uptick in rental revenue wasn't enough to offset the slain late-fees cash cow.
The real shame isn't so much that Blockbuster is failing; it's that if you take a few steps back and analyze the situation from a comfortable distance, this should be a time when Blockbuster is feasting on the fat of the land.
The four scapegoats you meet in purgatory
The first step in fleshing out Blockbuster's dire financial situation is to break through the notion that the company is toiling in a flawed sector. It isn't. The excuses ring hollow.
"Folks just aren't going to the movies."
This will be the third straight year for attendance declines at the multiplex, but why should Blockbuster catch the same bug? Theater operators have faulted movie studios for releasing their DVDs into the retail market earlier than they used to; they also complain that folks are staying home to enjoy the same flick on their high-end plasma and LCD television sets. If that's the case, Blockbuster should be rolling around in a blissful state.
"OK, but maybe these are just bad movies that folks don't want to see later, either."
That's stretching things, but let's roll with it. During last week's conference call, Disney (NYSE:DIS) pointed out that of the 10,000 DVD titles releases this year, only 413 were recent theatrical releases. TV shows and updated classics have been flooding the market. That may be bad news for the movie studios, but it should be ringing Blockbuster's dinner bell. Not only is there no shortage of supply, but also many of these series discs involve various rentals that take longer to return.
"Look at the competition! It's not just Blockbuster that's struggling."
Sure, Movie Gallery (NASDAQ:MOVI) has been a dividend-hacking disaster since swallowing the Hollywood Video chain earlier this year, but two ugly portraits in a yearbook doesn't necessarily make this an eyesore of a class. Motley Fool Stock Advisor recommendation Netflix (NASDAQ:NFLX) -- a stock that has thoroughly trounced the market all three times that David Gardner has singled out the company for the newsletter service -- hasn't had to catch its breath in lending out flicks on discs. Over the past year, it has grown its subscriber base by 61% to 3.6 million members, with more coming on board every passing day.
"The rules have changed. DVD by mail and digital delivery are the new way to enjoy films."
That may be true, but Blockbuster is the country's second-leading mail-order rental, with no one even close behind it. Digital delivery? Video on demand has been a major talking point in attacking Blockbuster's relevance for years, but it has yet to materialize in a major way. Even something like Apple Computer's (NASDAQ:AAPL) early success in selling video downloads has been limited to short films and series episodes.
When a reprieve is really a death sentence
Blockbuster's online storefront is the company's fastest-growing appendage, but it's bleeding bad at the moment. Any kind of covenant, even one that is temporarily relaxed before ramping back up next year, will hold Blockbuster back from growing aggressively when it comes to battling Netflix.
Just as worrisome is that the company will now be less likely to take chances to turn its stores around. Did you catch that stat I threw out earlier? Disney CEO Bob Iger claims that just 413 new DVDs that have come out this year were for movies that had just completed their theatrical runs. Blockbuster shouldn't be all about the wall of new releases. It should be promoting the various television shows that are now available. Its stores need to be remade to reflect that shift toward DVDs that consumers may not realize are available.
Emphasizing series DVDs and beefing up its retail merchandise are just what Blockbuster needs to get Joe Q. Renter to come back to the store. The problem? This is the kind of store makeover that Blockbuster may not be able to afford as long as there is creditor pressure to show favorable improvement immediately.
So where does this leave Blockbuster? Desperate. I felt that way about the company last year, and I'm obviously not feeling any better about its chances now. This is a company that should be making the most of its online traffic by monetizing its traffic through contextual advertising. This is a retailer that should be begging Amazon.com (NASDAQ:AMZN) to help it succeed online before Amazon runs off with Netflix or sets up its own video-rental storefront instead. This is a company starving for a cosmetic makeover at the store level. Having creditors relax their terms for a few months won't give Blockbuster the freedom it needs to truly reinvent itself. That's why, in the end, the relief is really nothing more than a leveraged tease. This is a predictable flick in which the ending has been telegraphed for a couple of years now.
If Blockbuster is smart, it will need to take the chances that no one thinks it is capable of risking. Do it, Blockbuster. Give the audience the plot twist that will really wake them up. If not, why waste our time? Just roll the end credits and be done with it.
Shares of Netflix and Amazon.com have been recommended in our Stock Advisor newsletter service. Learn more with a free 30-day trial subscription.
Longtime Fool contributor Rick Munarriz lives in South Florida, the original stomping grounds for Blockbuster. He also owns shares in Disney and Netflix. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
