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).
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?
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?
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.
Consumer electronics retailer Circuit City Stores Inc. (NYSE: CC) and leading domestics retailer Bed Bath & Beyond Inc. (NYSE: BBBY) are scheduled to report earnings tomorrow. Here's a quick peek ahead of results.
Circuit City has fallen short of earnings estimates in the past five quarters. When the Richmond, Virginia-based company reported fourth-quarter results back in November, its loss of 64 cents per share was deeper than the 31 cents per share loss forecast by analysts polled by Thomson Financial, as well as the nine cents per share loss in the same period of 2006. For the current quarter, analysts expect the loss to narrow to six cents per share, compared to a profit of 61 cents in the year-ago quarter.
The company's earnings per share growth forecast for this year is a dismal -92.7%, worse than the industry average, as well as the 2.45% of rival Best Buy Inc. (NYSE: BBY). So it's little surprise that the analysts' consensus recommendation is to hold Circuit City, and has been for at least three months. Shares are trading much closer to the 52-week low of $3.44 from mid March than the 52-week high of $19.12 from almost a year ago. The share price closed Monday at $4.76, and fell to about $4.62 in early trading Tuesday.
For more about pressure to oust the CEO, to drop Circuit City from the S&P 500, or other news that could influence earnings results, see BloggingStocks' Circuit City coverage.
Circuit City Stores, Inc. (NYSE: CC) is an awful business right now, and a big shareholder of the retailer wants Chairman and CEO Philip Schoonover to get the heck out. According to The Wall Street Journal(subscription required), Wattles Capital Management LLC owns 6.5% of Circuit City, and it's getting pretty tired of the CEO's dismal performance.
Bravo to Wattles -- it irks me when chief executives who aren't up to par remain at the helm of the ship. Regular, small-time investors really have no say in anything -- but the big-guy activists can throw their weight around and enter into proxy battles to keep the pressure on management. I completely agree with Wattles and its reasoning regarding the current state of Circuit City, and I hope its efforts will pull the retailer in a new direction and inspire fresh, shareholder-value-enhancing strategies. Easier said than done, of course, but with Circuit City's stock currently stuck below $5 a share, management needs some outside influence.
Circuit City is having a tough time against competitors like Wal-Mart Stores, Inc. (NYSE: WMT) and Best Buy Co., Inc. (NYSE: BBY); its brand equity is definitely suffering. As far as investing in Circuit City goes, it's not even a tiny blip on my radar at the moment; I'll have to wait and see how a turnaround -- if it is genuinely forthcoming -- evolves.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
Circuit City Stores, Inc. (NYSE: CC), the consumer electronics chains that continues to have earnings and profit meltdowns every quarter, may be seeing one of its more lucrative businesses slipping.
When it comes to offering services, the company's Firedog installation and service business is one of its most profitable. Similar to competitor Best Buy Inc. (NYSE: BBY)'s Geek Squad and Magnolia services businesses, this is how Circuit City makes a decent profit in the wake of slashed margins on many electronics products like flat-panel televisions.
But in Circuit City's case, the slowdown in home construction across the U.S. is having an effect on its installation business now -- so the main bandage on the wound is coming off. The company will be laying off 67 workers across the U.S. who specialize in pre-wiring new homes for sound and video. Although the retailer hopes to retain many of those workers in other areas within the company, my bet is that this won't happen.
There is no word on whether Best Buy's Magnolia installation business is being hit as the new housing construction business continues slowing across the U.S., but as the company reported Q4 earnings today, the weakness domestically and decline in same-store sales could indicate it would be hit as well.
Shares of electronics retailer Best Buy Inc. (NYSE: BBY) have been surging today, despite posting a decline in its fourth-quarter profit, as its earnings per share came in well above analysts' predictions. The company also issued a positive earnings outlook for fiscal 2009, sending its shares up over 2.5%.
The company said its quarterly profit dropped 3% to $737 million, from $763 million in the same period a year ago due to a slowdown in consumer spending. However, higher sales for laptop PCs and flat-panel televisions helped the company post quarterly earnings of $1.71per share, topping analysts' forecast for a profit of $1.65 per share.
Best Buy posted 4% growth for its fourth-quarter revenue, which climbed to $13.42 billion. During the period, the largest U.S. electronics retailer faced lower demand for its products as soaring gas prices and tight credit conditions put a curb on consumer spending. However, the company was able to successfully surpass those obstacles defying analysts' expectations for revenue of $13.19 billion in the third quarter, according to Thomson Financial.
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