In the classic standoff between value and growth in the movie-rental business, Blockbuster's (NYSE:BBI) pain is Netflix's (NASDAQ:NFLX) gain today.
Blockbuster reported a mixed bag during its earnings release today, making it hard to discern precisely how turnaround efforts are progressing. If you recall, Blockbuster has been experiencing deteriorating growth at its flagship rental stores, and it's working furiously to stabilize store growth by focusing on movie sales and rentals. At the same time, it's also building an online rental business to steal a share of Netflix's dominance in cyberspace.
Turnaround effort timing has been of the essence since Viacom (NYSE:VIA) saddled Blockbuster with a sizeable debt load when spinning it off a while back. Since that time, Viacom has also parted with television operator CBS (NYSE:CBS), which appears to be holding its own as an independent firm. So when will Blockbuster get its act together?
The market clearly considered Blockbuster's improvement efforts for this quarter unimpressive, sending the shares down about 10% currently. That should be good news for Netflix, which is up more than 7% with no other significant news, though it just reported its own mixed results earlier this week.
Basically, Blockbuster reported a small operating loss for the quarter, but posted positive earnings of $0.31 per share compared to a loss last year. To explain the gain, the company offered another figure that excluded both the cost of closing several hundred underperforming stores and a large benefit from a favorable tax audit. The adjusted figure was a loss of $0.13 per share; operating cash flow was positive for the six-month period, though free cash flow was slightly negative.
Overall sales fell 5% for the quarter, due primarily to the lower store count, but this appeared to help domestic same-store sales for movie rental revenue, which increased 3.8%. Total domestic rental comps were up only 1.6%, most likely due to weaker game rentals. Worldwide same-store sales suffered a bit more, falling 9.2% for the quarter.
The online rental business appears to be doing OK; management reported 1.4 million subscribers as of June 30, including 100,000 trials. Some analysts were disappointed with the slow growth, blaming it on a lower advertising budget. Anecdotally, I've used and enjoyed Netflix for a couple of years now, but decided to sign up for a trial at Blockbuster to see how the two services compare. I also like the added bonus of a couple of additional in-store rentals as part of the monthly plan. We'll see how overall consumer tastes develop for the two similar offerings.
One big positive: Blockbuster paid down about $150 million in debt for the quarter, reducing liquidity concerns. Core operations still have to improve further, though, for cash flow to reach consistently positive levels.
Overall, it looks like things have improved slightly for Blockbuster, though it is still has a fair amount of debt, and its stores are clearly a work in progress. I think the stock is a value play trading at a low multiple of sales, despite its currently nonexistent free cash flow. Competitor Movie Gallery (NASDAQ:MOVI) is also hanging out in the cellar, trading at a fifth of its high over the past year, but its online efforts are less significant. It will be interesting to see how the industry shakes out, considering the ongoing move to online renting and an eventual migration to downloading movies from the Internet.
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Fool contributor Ryan Fuhrmann is long shares of Blockbuster but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to discuss any companies mentioned further.
