Video chain Blockbuster (NYSE: BBI) reported earnings earlier this week for the fourth quarter. While there were some positive aspects to the story, I can tell you that the stock is not a buy at all, at least not from where I sit.
Okay, let me throw some of the good stats out at you. According to the press release, Blockbuster's same-store sales, or comps, are doing well. In Q4, domestic comps rose well over 4%. Free cash flow was positive. And earnings on an adjusted basis calculated out to $0.40 per share. That was a huge beat, since analysts were looking for $0.25 per share.
You know what, though? I'm not buying this particular plot line. I didn't like that revenues declined 12% in the quarter. Yes, I know there are fewer Blockbusters these days, but you know why that's so? That's right, the company's business model isn't exactly rocking. Now, for the full year, no free cash was generated. I know, the fact that there was free cash in Q4 may be indicative of a new trend. Still, I don't like it. And then there's the issue about the comps. Okay, here's an interesting note about that. The positive comps in Q4 were mostly the result of games and merchandise related to games. Also, consumer electronics helped out, too. The actual rental business declined over 2% in terms of comps. The comps for the games/electronics category went up by over 36%. Sure, Blockbuster's management is doing a decent job of finding other retail categories to use as growth. Thing is, though, the team is still obligated, in my opinion, to do what it can to get people renting videos.
I mean, think about it. What happens if the DVD-rental portion of the model continues to be a drag? That can't be good long-term. Blockbuster has to address the new media age where people can simply stay at home and access video-on-demand platforms supplied by cable entities such as Comcast (NASDAQ: CMCSA). Then there's the internet. People can get all kinds of shows and movies from places like Hulu.com, which is a venture backed in part by General Electric's (NYSE: GE) NBC Universal and News Corp. (NYSE: NWS). And then there's the threat of Netflix (NASDAQ: NFLX). People seem to love the DVD-rental-by-mail strategy. BloggingStocks contributor Steven Halpern highlighted Netflix's growth prospects, as outlined by an analyst, not only in terms of physical media, but from the perspective of internet streaming and the like. Blockbuster simply hasn't engaged digital delivery like it should have.
Blockbuster has tons of problems, enough to outweigh whatever positive elements I mentioned. Its financial woes have fueled rumors of bankruptcy. Its brand equity is suffering. And, worst of all, look at the stock price. It closed on Friday at $0.82 per share. It's a lottery ticket, my friends. One that I am not willing to purchase.
Disclosure: I own GE; positions can change without notice.
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Reader Comments (Page 1 of 1)
3-28-2009 @ 12:13AM
Drizz531 said...
You should probably rewrite this know that your only gripe of not being digital has been addressed with Tivo and possibly APPLE and SONY all late this year, TIVO of course being the only officially concrete one so far and APPLE bieng in talks and SONY just hates Xbox who Loves netflix so why would Sony take on Netflix over BB?
3-28-2009 @ 1:14AM
Aaron said...
Steven,
What you know about retail, you could probably write on the back of a postage stamp with a crayon...
Retail is ALL about what you can do to drive revenue per sq ft. Given that, the new CEO is putting that to task while generating more revenues using the Blockbuster name. Games, Concessions, Pre-Owned media, etc... all seek to increase revenues from the customer base while targeting and educating on new offerings. Blu-Ray, PS3, Wii, Total Access, TiVo are all examples of this.
It's all about the brand and leveraging the customer whether that is at a store, on-line or in front of the 7-11 where the new Blockbuster Kiosks will go when replacing RedBox across the country. Blockbuster stores will work well where they work well and where they don't... well Blockbuster will give the customer a choice.
This stock is only a lottery ticket for those who don't understand retail or the definition of Brand.
Good luck to you on GE... talk about a lottery ticket (GEnron by 2010)