Blockbuster’s Fate: Dying Store Model May Work (BBI, NFLX, CSTR, TIVO, CMCSA, TWX, AMZN)

Blockbuster Inc. (NYSE: BBI) is dying if you read today’s headlines.  Word from most media outlets today is that Blockbuster may close some 960 stores.  Ouch.  That sounds as though there will be no stores left until you look further into it. SEC filings filed today disclose new credit pacts.  The company gave investors a glimpse of its plans.  If you can get past the headlines, the reaction was actually a positive one.

Blockbuster currently has 3,750 company-operated stores and 606 franchised stores.  This number has been shrinking for longer than memory serves.  And it has been a model that dies slower than a healthy smoker.  While this portion of its model has been tough, the same can be said for rival Movie Gallery and Hollywood Video.

On an EBIDTA basis, Blockbuster said that 35% of stores accounts for 80% of EBITDA.  The 47% of its non-core ‘profitable stores’ is 30% of its EBIDTA, while its 18% of stores which are unprofitable account for -10% of its EBITDA.  So here is the current and existing store closing goal from a table in its SEC Filing:

• 280 to 300 stores for normal closures in 2009, with an accelerated closure of 300 to 385 more stores;
• The normal closure for 2010 is 100 to 125 stores, while the accelerated store closure is 130 to 150 stores.

But the total figure may in fact be higher as many of its remaining leases are coming up.  It sees an additional store count with lease mitigation or termination efforts of 275 to 300 stores.  The company also noted that 250 to 300 stores could be converted to ‘outlets.’  If that second wave comes true then this could be 1,335 to 1,560 stores after it is all said and done.

Its TOTAL ACCESS that competes with NetFlix Inc. (NASDAQ: NFLX) has 1.6 million subscribers and the firm claims that it is profitable.  Blockbuster said it has a growing base and aims to be highly profitable there.

The kiosk unit has only about 497 current units, yet it wants 2,500 unites by year-end and wants to have some 10,000 units by mid-2010 under a license model.  Here it competes with the 15,000 Redbox units owned by Coinstar, Inc. (NASDAQ: CSTR).

Blockbuster also plans to grow its OnDemand business including new releases through partner Tivo Inc. (NASDAQ: TIVO), but  it will have to compete with the likes of Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC), and even the likes of Amazon.com (NASDAQ: AMZN).

You can dig through the rest of the filing if you wish to here.  All in all, you’d think that Wall Street would be getting fed up with this oh-so-90’s model on Main Street.  Yet Wall Street rewarded the news today.  Blockbuster closed up over 5% at $1.40 on more than double an average day’s volume.

It is interesting that the closings just keep coming and that there is no fresh punishment.  Based on the trends we have seen year after year and based on the trends of media, it is probably a safe prediction that we’ll be noting in 2011 or 2010 that Blockbuster is reviewing a whole host of additional store closures.

JON C. OGG
SEPTEMBER 15, 2009