Blockbuster (NYSE: BBI) announced first-quarter earnings on Thursday, and while it beat the market's expectations, I can't say I'm terribly excited. Revenues decreased a little over 5% to $1.4 billion. Net income from continuing operations came in at $0.21 per diluted share. Briefing.com says that this performance was $0.06 better than Wall Street's average call. Revenues, however, missed expectations.
Why am I not excited about the performance here? I mean, not only did the bottom line trounce the wizards of Wall Street, but domestic comps increased 2.9%. Well, for one thing, the cash flow was nonexistent. Both operational and free cash-flow were negative; granted, the company used a lot less cash this time for operations, and the deficit in terms of free cash was much better, but still, I don't see any positive green.
Plus, there's just the general idea of Blockbuster itself. My feelings haven't changed since I last wrote about the movie-rental business and its earnings. I still believe that Netflix (NASDAQ: NFLX) and video-on-demand limit the upside potential of the company's long-term prospects (perhaps I shouldn't just say limit; maybe threaten is better terminology, who knows).
The earnings party of last week was full of fun and frolic. For the most part, if you followed my list of recommendations, you would have had your very own "Fiesta de Finance." (See Week in Preview – May 5)
The earnings season is still in full swing and should provide a great deal of action for the companies that will be reporting. But these companies will have to fight through a few new economic barriers. With oil pushing past historic levels and questions beginning to surface concerning the ability of the investor to continue to support a market that has so many headwinds, the mood is likely to shift moving forward. It is time for discipline, short and simple. Now, more than ever investors need a plan. I cover this strategy in my book, The Disciplined Investor.
In the last installment of The Week in Preview, I was looking for party opportunities in honor of Cinco de Mayo. This week, Misery is the theme. That is the only word that comes to mind with oil at a level that you would have never expected, a massive and unrelenting credit and housing crisis and a banking system that is defunct.
Monday - May 12
We start the week with a report from IndyMac Bancorp (NYSE: IMB). This bank is smack in the middle of the housing problem. It is primarily a lending company that facilitates loans for single-family homes. It's also involved in the origination and trading of mortgages. How does that sound to you as an investment? Shares have slid from $23 in October 2007 to an unbelievable level of $3.50 recently. Ouch... If you are a shareholder still holding on with hope and a prayer for something...anything, keep on dreaming. The good news is that the stock is sporting a yield of 29%. But, if you think that yield is going to be maintained, I have a bridge for sale. Estimates are for a loss of $1.92 per share for the quarter.
Despite a lower "trade deficit" number, investors have been taking profits. Seeing oil go over $126.00 hurt more than a horrible turnout in financials. Below are the unofficial closing levels:
American International Group, Inc. (NYSE: AIG) fell over 8% to $40.26 after reporting huge losses and disclosing that would raise $12.5 Billion in capital.
For the past year, Circuit City (NYSE: CC) has done a nice job short-circuiting its shareholders. But lately, there has been hope.
In fact, today the company essentially said it's "in play" for a sale. That is, it will allow Blockbuster (NYSE: BBI) – which has expressed buyout interest – to check out the books.
Although, it helped that billionaire activist investor, Carl Icahn, has been pushing for a deal. In a letter to Circuit City, he said he'll write a check to buy the company if Blockbuster can't come up with sufficient financing.
Yet, the question lingers: does a combination makes sense? After all, both Circuit City and Blockbuster are ailing. So why would a merger of two duds turn into a great entity? I seriously doubt it's something that frightens the folks at Best Buy (NYSE: BBY).
Then again, Circuit City may really be allowing itself to be sold to another player. For example, the company put an end to its proxy fight with Wattles Capital Management, which got three board seat. Oh, and Circuit City has retained Goldman Sachs (NYSE: GS) to explore strategic alternatives.
Thus, for the most part, Icahn is playing his typical role as the instigator. Keep in mind that he can be pretty tough to negotiate with – especially when you're selling your company to him.
And, so far in today's trading, Circuit City's shares are up 8%.
As an investor, I wouldn't want to get any closer to Blockbuster's (NYSE: BBI) patently stupid effort to buy Circuit City (NYSE: CC) than I have to.
But HBK Investments -- which owns 9% of Circuit City, 8% of the class A stock of Blockbuster, and 5% of the company's class B stock -- has filed a 13-D on the matter, attaching a letter urging Circuit City to give Blockbuster access to the material it needs to perform due diligence. HBK added that if Blockbuster withdraws its offer because of a lack of cooperation by Circuit City's Board, "we believe Circuit City shareholders will be immediately and substantially damaged."
The fund also added that it might be able to provide financing for the deal, and expressed its confidence in the prospects for a combined company: "We believe that over $300 million per year in increased EBITDA could be realized following an acquisition by maximizing cost savings between Circuit City and Blockbuster."
That's a pretty impressive suggestion, and one that flies in the face of what many analysts have said about the proposed deal. But HBK didn't grow to around $14 billion in assets with stupid decisions, so maybe they're onto something.
Consumer electronics retailers Best Buy, Inc. (NYSE: BBY) and Circuit City Stores, Inc. (NYSE: CC) are now stocking only Blu-ray disc players in the wake of the fall of competitive format HD DVD. So far, Blu-ray disc players still are not that competitively priced compared to standard DVD players, which the industry may have a problem with if consumers continue to decide that standard DVD is "good enough" to use with that new flat-screen TV.
But at least the software catalog within the Blu-ray camp is getting some support. In addition to recent sales that placed some hit movies in the same price category as standard DVD players, the two retailers are not forgetting the huge camp of Sony Corp. (NYSE: SNE) PlayStation 3 owners, all of whom have a full Blu-ray disc player built into their gaming machines. This Blu-ray "owner's club" of sorts is a captive market at this time, and the two largest consumer electronics retailers are taking advantage of it. For example, a "buy 2, get 1 free" special is in effect this week at Circuit City stores, while Best Buy is offering a free $10 gift card with the purchase of two Blu-ray titles.
Not that both retailers have a lot of work to do -- they are both promoting Blu-ray just fine -- but hardware prices and eventually movie title prices will need to reach critical mass from the manufacturers and disc distributors before consumers go nuts on the format like they did with DVD a decade or so ago. It's nice to have a single, next-generation optical disc format to make the choice for the consumer dead simple. But, those consumers want the lower price also -- and Blu-Ray still isn't there yet. With gas hovering at record levels, would you buy one right now?
Blockbuster (NYSE: BBI) must want to own a piece of everything. First, it made a bid for Circuit City (NYSE: CC) and now it is trying to get a piece of the new pay TV channel being launched by Viacom (NYSE: VIA).
Viacom says it will start a TV network with movies and other video content with contributions from MGM and Lions Gate (NYSE: LGF). The channel will compete with HBO and Showtime.
According toThe Wall Street Journal, "As part of a deal being discussed, Blockbuster would get digital rights to the new channel's programming in return for an investment in the partnership."
How that makes sense is a mystery. The Viacom channel can sell DVDs though a number of outlets. Streaming content over the internet does not require help from Blockbuster. How does a company with rental stores and a DVD-by-Internet operation help a pay TV channel which will be distributed by satellite and cable?
Blockbuster has problems of its own. For starters, it just needs to stay in business. Its stock trades at $2.98, near a 52-week low, and down from more than $20 less than five years ago. Putting capital into new ventures or nutty M&A transactions is a waste of shareholder money.
I'm not a huge fan of Blockbuster (NYSE: BBI), but I do concede that I think the movie renter is on to something with its latest move. According to this brief AP piece, Blockbuster wants to leverage the current video game console cycle to add value for its shareholders. Management intends to increase its presence in this sector by adding more hardware, software and accessories dedicated to consoles from Sony (NYSE: SNE), Microsoft (NASDAQ: MSFT) and Nintendo (OTC: NTDOY) to its locations.
This would be wise. I think all retailers should have a comprehensive and well-defined strategy when it comes to video games -- why let GameStop (NYSE: GME) have all the fun? Blockbuster should really go all out on this form of leisure entertainment and aggressively pursue this potential area of growth. Kids -- and teenagers and adults, for that matter -- love to try before they buy when it comes to game software.
Management has to realize, however, that it's not enough to just expand its video game sections; oh no. Indeed, some heavy branding and promotional initiatives are definitely required to convince consumers that Blockbuster is a go-to place for rental/buying needs related to PlayStation 3, Xbox 360, Wii and the Nintendo DS. I haven't thought of Blockbuster as a place to rent video games for a long time now (I also haven't thought about Blockbuster in general, since there aren't any close to me anymore).
So, yes, Blockbuster should do what it can to hitch onto the hot video game growth curve. This is a much, much better idea than buying Circuit City (NYSE: CC), I can tell you that. (For more on that debacle, check out Zac Bissonnette's recent post on the subject.)
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
It's easy to understand why Blockbuster's (NYSE: BBI) out-of-nowhere bid for Circuit City (NYSE: CC) has been greeted with such skepticism: it's one of the most patently moronic business stories in recent months. And given the subprime mess, that's saying a lot.
The New York Times quotes a number of analysts, all of whom expressed substantial skepticism about the Circuit City deal. Most just don't see the point. Some worry that such a large deal will distract Blockbuster management from the task of restructuring its struggling core business.
Lehman Brothers analyst Douglas Anmuth has a creative take on it, pointing out that Netflix (NASDAQ: NFLX) could be the ultimate beneficiary of the deal: "The extensive use of both financial and management resources by Blockbuster throughout this process could be positive for Netflix as Netflix continues to focus on growing its subscriber base."
I'm not so sure about that, but I would look at it this way: how confident can Blockbuster be about its future as a stand-alone company if it's trying to pour its resources into such a bizarre acquisition?
Carl Icahn has said he is willing to step in as the financier of last resort if no one else will finance the deal, which seems like a good bet. Given the status of the credit markets, I can't see any bank rushing in to finance this universally maligned deal.
But questions remain about Icahn's offer. What are the terms? The publicly available details are vague.
Whether the deal will get done is anyone's guess. I'll leave Circuit City to the arbitrageurs, but I'd stay away from Blockbuster. This drunken-sailor grabbing the arm of another drunken sailor bid looks desperate -- and may indicate that Blockbuster's management is far less confident about its future with or without Circuit City than it's been letting on.
For a company so in the dumps, there seems to be a whole lot of attention focused on Circuit City Stores, Inc. (NYSE: CC) these days. First, Blockbuster, Inc. (NYSE: BBI) offered to buy the struggling consumer electronics retailer for about a billion dollars recently. Circuit City finally made the offer public. Another party that has shown interest in acquiring Circuit City is now demanding the retailer open its books for review.
Wattles Capital Management, which owns a decent chunk of Circuit City's shares, delivered a letter yesterday to the retailer's board demanding that it investigate other potential suitors for the company (i.e., seek other interested acquirers), as well as provide open access to the company's financial operations. One would think that being a public company gives a decent amount of insight into the books already, but Circuit City may be hiding something. Or not. Wattles just wants some feedback from a company that has talked "transformative process" for quarters, but that clearly has no clue how to dig itself out of the hole it is in.
Part of Wattles' letter to the board yesterday included questions about 1) the fact that some of Blockbuster's financing could be derived from Circuit City's own balance sheet, 2) how Carl Icahn could assist in the buyout and 3) Blockbuster's "very short" due diligence process.
Wattles wants to make sure there are no inside shenanigans going on here that would give Blockbuster unique access to a buyout without considering other parties as potential acquirers of the electronics retailer. It seems more than one party wants to buy Circuit City these days, and for the fire-sale price of its stock, who could blame any of them?
When Blockbuster (NYSE:BBI) said it would buy Circuit City (NYSE:CC), it may not have occurred to many on Wall Street that the movie rental company did not have the money to do the deal.
Surprise.
According toThe Wall Street Journal, "Concerns about Blockbuster's methods for financing a bid contributed to a sharp fall in the company's shares when it announced its move last week." Blockbuster investor Carl Icahn may help put up some of the capital and there is cash on the Circuit City balance sheet.
Part of the argument for Circuit City being a good buyout target is because its shares are down more than 40% in the last six months. Those who bother to look at a stock chart will see that Blockbuster shares are down by the same amount during that period. Circuit City now has a market cap of $740 million. Blockbuster's is only $605 million.
All of this data is simply data. The biggest reason for Blockbuster to drop its bid is that, if it has not been able to fix its own company, how does it expect to fix Circuit City?
Douglas A. McIntyre is an editor at 247wallst.com.
When Blockbuster Inc. (NYSE: BBI) announced at the start of this week that it would offer over $1 billion for struggling consumer electronics retailer Circuit City Stores, Inc. (NYSE: CC), there were probably quite a few people who were left scratching their heads. Why would two companies in a downward spiral want to combine? Well, to try and save both companies if possible. Other theories have been put forth ad nauseum, but if the takeover does go through, the first order of business should be to toss platitude-spouting Circuit City CEO Phil Schoonover.
Lured from larger competitor Best Buy, Inc. (NYSE: BBY) back in 2004, Schoonover's experience with the largest consumer electronics retailer in the U.S. was seen as helping Circuit City. It hasn't worked out, though: Circuit City has not gained a single inch against Best Buy and it has slowly traveled the road to mediocre and now deplorable performance. Why most of Circuit City's management team exists is beyond me, even with Schoonover trumpeting the "turnarounds" and "we have plans in place" phrases he doles out at every quarterly conference call.
It's too bad -- Circuit City could have been a formidable competitor to Best Buy, but was outmaneuvered at every possible turn by a more nimble (but much larger) competitor. Wattles Capital Management, which at one time was rumored to be looking at a takeover of Circuit City, has wanted the current Circuit City board tossed out for quite some time. Mark Wattles, the owner of Wattles Capital Management, said in a letter to the company's board, "We are confident that the right senior management team with the right strategy and focus would be able to immediately and dramatically improve Circuit City's profitability." Regardless of where Circuit City is headed, one thing is certain: Schoonover and his cronies should dust off their resumes -- not that they are very impressive.
Today's markets could have actually been a lot worse. Oil rose $1.63 to $111.77 per barrel, making $100 ancient history. The March retail sales numbers would have been great at the +0.2% reading except for the fact that it was due to higher gas prices paid at the pump; otherwise sales would have been flat. In the environment of weak spending, that might still be a win. After everyone's favorite conglomerate killed the markets Friday, these small losses are a win. Below are the unofficial closing levels:
After Blockbuster (NYSE: BBI) announced its bid for Circuit City (NYSE: CC) in the $6-8 range this morning, Circuit City replied in a press release that "to date Blockbuster has been unable to satisfy Circuit City and its advisors that Blockbuster's proposal could be financed."
Now the Wall Street Journal is reporting (subscription required) that "Mr. Icahn, a Blockbuster director whose companies own about 16% of Blockbuster's Class A shares, has agreed to backstop Blockbuster's rights offering if it cannot obtain the financing elsewhere, according to Circuit City investor Mark Wattles."
All of this raises an interesting question: has Mr. Icahn gotten daft? Blockbuster shares are down more than 16% on the news of this offer, strong evidence that, rightly or wrongly, Icahn is seeing something investors don't.
In any case, Icahn's backing removes one big stumbling block from this deal's path, as there is no question that he has the resources to make it happen. Even so, at its current price of $5.08, Circuit City is trading at a wide discount to the $6-8 offer contemplated in the letter. Perhaps people think King Icahn will change his mind.
As Doug McIntyre reported earlier, Blockbuster (NYSE: BBI) has extended a preliminary offer to acquire Circuit City (NYSE: CC) "with an all cash offer in the range of $6.00 to $8.00 per share, subject to due diligence."
In a press release, Blockbuster said that Circuit City has not yet provided it with information necessary to conduct due diligence, and that it "believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company."
The pre-market trading tells the story on this one. Share of Circuit City are up more than 55% to $6.14, at the lowest end of the range Blockbuster's press release contemplates. This indicates investor skepticism about the prospects of a deal getting done. In a press release responding to the offer, Circuit City noted that "to date Blockbuster has been unable to satisfy Circuit City and its advisors that Blockbuster's proposal could be financed." Meanwhile shares of Blockbuster are down about 11%, a sign that investors aren't too excited about the prospect of a Blockbuster-Circuit City combination.
It's easy to understand why. This deal would be the absolute epitome of "two drunken sailors trying to hold each other up." Both of these companies have experienced precipitous declines in recent years, reporting losses as industry changes and more nimble competitors take their market share.
The earnings party of last week was full of fun and frolic. For the most part, if you followed my list of recommendations, you would have had your very own "Fiesta de Finance." (
For the past year, 
and 
. He also operates 
Consumer electronics retailers 
Blockbuster
For a company so in the dumps, there seems to be a whole lot of attention focused on 
When 
Comfort Zone Investing: One thriving area of real estate: Apartments
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
