Blockbuster says strong box office hurt it in first quarter

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As if crushing debt, the recession, Netflix and Redbox weren’t enough, Blockbuster Inc. has a new foe: the booming box office.

That’s according to Jim Keyes, chief executive of the struggling but still massive DVD rental chain, who today attributed much of his company’s weak performance last quarter to the growing number of people watching movies in theaters and not their living rooms.

‘We estimate nearly 3 million more people are going to the movies each week in 2009’ than in 2008, he said on a conference call with analysts. ‘This has been pulling traffic from Blockbuster stores.’

The 14% increase in movie ticket sales this year hasn’t hurt Netflix, which gained nearly 1 million subscribers last quarter and saw revenue grow 21% from the previous year.

It’s tough to ignore Blockbuster’s own problems, most notably the cash shortage and looming debt repayments that forced it to cut unit availability by 20% during the first quarter in order to preserve cash. Revenues plunged nearly 20% to $1.12 billion from the same period last year, while net income was down 39% at $27.7 million.

Both figures were significantly below investors’ expectations, which sent Blockbuster stock plummeting 23% in after-hours trading to 88 cents.

‘The main issue is that same-store sales were worse than expected and there’s a concern about how long it will take them to get back on track,’ said Arvind Bhatia, an analyst at Stern, Agee & Leach.

Keyes promised that Blockbuster’s stores would be fully stocked and aggressively marketing the value of rentals. The company eased its liquidity concerns last month by renegotiating a revolving line of credit on which it relies, which was set to expire in August. The ‘revolver’ now won’t end until September 2010, though Blockbuster had to reduce the available credit to $250 from $350 million and accept a higher interest rate.

The CEO pointed to a number of initiatives that could improve performance later in the year, including a strong lineup of films such as ‘Star Trek’ and ‘Fast and Furious.’ Blockbuster is also looking to sell consumer products like ‘movie-themed sunglasses’ and Blu-ray players in stores, grow its Netflix-like DVD-by-mail and digital download businesses, and roll out more than 3,000 Redbox-like kiosks through a partnership with manufacturer NCR. Blockbuster is also looking to slash $250 million in costs through store closures and other initiatives.

All that won’t matter, however, unless Blockbuster can improve the terms of its debts, which currently stand at $922.5 million. Keyes described the renegotiated line of credit as ‘a bridge to the future when the cost of capital is not as punitive.’ Bhatia said it essentially gives the company a year of breathing room to try and improve its operations.

‘I think they can focus on operations for the next 12 to 15 months,’ he explained. ‘But they will not have the same flexibility they did before unless the capital markets improve dramatically.’

-- Ben Fritz

Photo credit: Ron Heflin / Associated Press