Another Setback But Blockbuster (BBI) Is Likely To Survive

Blockbuster’s (BBI) auditors gave the company a “going concern” letter which is often a kiss of death. The document is a way for the accounting firm to say the operation is unlikely to make it another year. In Blockbuster’s case, the news probably is not all that bad. The firm’s creditors have already agreed to restructure debt and give Blockbuster more time to re-create its business and build back the revenue that it is losing from renting movies out of stores. Alternatively, there is some expectations that Blockbuster can slash expenses so brutally that its operating income will recover.

The note, contained in the company’s 10-K,  also says that Blockbuster has reached agreement with its lenders on both term loans and revolving credit facilities. Now, the pressure is on the management to deliver operating margins this year.

Looking at the company’s position, the road to profit is almost certainly closing a significant number of the firm’s nearly 3,900 company-owned stores. If leases on the retail outlets can be reduced or terminated, Blockbuster gets to not only reduce the costs of those obligations but can fire the employees at every store that it closes.

It is a hell of a way to run a railroad, but Blockbuster does not have any other options.

Douglas A. McIntyre