Is Blockbuster (NYSE:BBI) ready to throw in the towel on its fledgling mail-order DVD-rental business? The company's CEO met with creditors earlier this week -- never a good sign -- to warn them about Blockbuster's continued weakness.
Analysts were already expecting the company to post a loss on flat sales growth for its June quarter next week. If the company's stores are performing poorly, it's highly unlikely that the holders of the rental giant's debt will take warmly to the company's costly efforts to take on Netflix (NASDAQ:NFLX).
The fact that Netflix came through with better than expected profitability over the same period doesn't make things easier for Blockbuster. The market now realizes that Netflix can coast along at its current price point, offering unlimited rentals for $17.99 a month with three discs out at any given time. Blockbuster has tried to compete on price. Its similar offering is a few bucks cheaper and even includes two free in-store rentals. However, it's becoming clear that in battling Netflix on price, it appears to be cheapening the value proposition of its flagship bricks-and-mortar business.
Blockbuster can raise prices, it can try and team up with a company like Amazon.com (NASDAQ:AMZN), or it can pull out of the online niche altogether. The company is going to have to choose one of those three paths because the status quo isn't going to save it from a collision course with its debt covenants.
It would be a shock to see Blockbuster turn a profit for the June quarter. Its largest rival, Movie Gallery (NASDAQ:MOVI), announced that same-store rental revenue at its Movie Gallery and Hollywood Video stores was off by 8.4% for the same period. Strong sell-through retail business trimmed Movie Gallery's comps to a decline of just 5.5%, but it will be hard for Blockbuster to fare much better than that.
So everyone will likely turn to billionaire investor Carl Icahn after the company's quarterly report. He was successful in landing a spot on the Blockbuster board and he's never one to take an investment lightly.
Blockbuster's recent move into the online space and its questionable "no late fees" marketing campaign have not improved the company's financial position. If anything, Blockbuster has damaged its offline prospects by devaluing its core rental business. This doesn't mean that "be kind, rewind" is the company's best option. Times have changed and many of Blockbuster's latest initiatives aren't immediately reversible. Unfortunately, worried creditors may not give the company much of a choice.
You can rent Back to the Future, but you can't live it.
Other links that you may want to queue up and check out:
- Netflix was back in black last week.
- Learn more about Netflix's ad-vantageous move.
- The company is also selling some of its pre-viewed discs these days.
- It's all a part of the company realizing that it needs to think about tomorrow.
Netflix and Amazon have been singled out in our Motley Fool Stock Advisor newsletter service. Subscribe to see what other stocks are catching David Gardner's eye these days.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
