The battle for control of Blockbuster (NYSE:BBI) has had enough plot twists in recent weeks to make investors wonder whether they're watching a proxy fight or the latest installment of Survivor. It actually looks like a bit of both. Amid the acrimonious exchange of charges and countercharges, the company's first-quarter earnings release from this morning is sure to turn up the heat yet another notch.
Before I get into the most recent episodes of the proxy battle, let's review the numbers. Total revenues were up 3%, as increases in base rentals and merchandise sales were largely offset by a whopping $145 million drop in "extended viewing fees," a result of the "No More Late Fees" program initiated last fall. Worldwide same-store revenues fell 0.4%, but the company reported an increase in online rentals, as well as the first growth in its active store member base in nearly two years. All told, the company saw a $60 million reduction in gross profit compared with the same quarter last year.
Operating expenses were up $140 million, largely because of launch expenses for the "No More Late Fees" program and a $12.6 million hit from the abandoned run at acquiring Hollywood Video (NASDAQ:HLYW), which eventually succumbed to the affections of Movie Gallery (NASDAQ:MOVI). Put it together and you have an operating profit decline of a cool $200 million, resulting in a first-quarter loss of $0.31. That was slightly worse than Thomson First Call analyst estimates of a $0.28 loss. Free cash flow dropped $115 million to negative $148 million for the quarter.
Now on to the reality show, which I discussed last month. On April 21, corporate raider Carl Icahn, who controls 9.7% of Blockbuster Class A shares and 7.7% of its Class B shares, notified investors that he was nominating three new members for the board of directors -- himself and entertainment industry veterans Strauss Zelnick and Edward Bleier. A vote at the May 11 shareholders' meeting will decide the nominees' fate.
Then, as Rick Munarriz mentioned in a story earlier today, Institutional Shareholder Services, which makes recommendations on proxy contests, said stockholders should vote "yes" for Zelnick and Bleier, but "no" for Icahn. The recommendation noted that Blockbuster could benefit from the pair's extensive media experience. Shortly afterward, the Blockbuster Franchise Association weighed in with a show of support for the incumbent board. The association said that it does not believe "BBI can succeed if its board is divided into conflicting camps."
In the meantime, Standard & Poor's cut Blockbuster's debt ratings from BB to BB-minus, citing concerns over the company's ability to raise revenues and the loss of late-fee income. Blockbuster CEO John Antioco has indicated that he will not stay with the company if he is ousted as chairman,. In addition, Antioco has not decided whether he'll stay if he retains his seat, but the two dissident directors are elected to the board.
I predict that this reality show will have even more plot twists between now and the May 11 stockholders' meeting, when all the participants meet at the "tribal council" and see who gets voted out.
After today's earnings release, it's hard to say what's better for the company -- continuing with current management or bringing some new faces to the board. Next week, we'll find out what the shareholders think. Until then, stay tuned.
For more vintage video, see:
Fool contributor Timothy M. Otte welcomes comments on his articles. He doesn't own shares in any of the companies mentioned here.
