Blockbuster Seeks to Bolster Investor Support

Blockbuster Inc. tried Friday to shore up investor support as the movie-rental chain’s stock hovered close to its all-time low on the heels of a disappointing financial report for the April-to-June quarter.

Chairman and Chief Executive John Antioco vowed again that the company would turn a profit in the fourth quarter.

Antioco suggested the quarter would also look good in comparison with the same period last year because the firm won’t spend the $100 million it did in late 2004 on new business initiatives. Blockbuster paid to build an online subscription service and advertise the chain’s decision to eliminate most late fees.

“For the balance of 2005, we are clearly focused on maximizing profitability and cash in a difficult industry environment,” Antioco said in a statement, “and as I have stated earlier, we expect to be profitable in the fourth quarter of this year and for the full year 2006.”

Blockbuster shares fell 14% in the first four days of the week and were down 11 cents, or 2%, to $6.71 on Friday. On Wednesday they hit $6.30, their lowest since being listed in August 1999.

Also Friday, Moody’s Investors Service cut its ratings on Blockbuster debt, which were already below investment grade, and gave a negative outlook, raising the possibility of additional downgrades.

Moody’s cut Blockbuster’s corporate family rating by two notches to B3, and downgraded senior subordinated notes three levels to Caa3.

The rating service said earnings and cash flow dropped “very significantly” because of spending that wasn’t adequately forecast by management, hurting liquidity. It warned that Blockbuster might violate restrictions on its bank debt.

Blockbuster disclosed this week that it had negotiated with its bank to prevent a high debt ratio from triggering default on a line of credit. The company said otherwise it would have been in default in the second quarter.

Antioco repeated Friday what he told Wall Street analysts Wednesday when the company reported a $57.2-million loss in the second quarter: that the end of most late fees is bringing people back into stores and that the online service is growing.

Those moves will help boost revenue late this year, he said.

Antioco again blamed much of Blockbuster’s trouble on “industry challenges,” which he has said include a general “malaise” toward movies -- in theaters and on rental shelves.

In other earnings news, Movie Gallery Inc., the No. 2 video-rental chain, said it had a second-quarter loss of $12.2 million, its first in 10 quarters, because of costs to acquire Hollywood Entertainment Corp. and a slump in movie rentals. Shares fell 5.1%.

The net loss was 39 cents a share, contrasted with net income of $10.6 million, or 32 cents, a year earlier, Dothan, Ala.-based Movie Gallery said Friday. Sales in the period ended July 3 almost tripled to $504.7 million after the purchase of Hollywood Entertainment. Expenses related to the acquisition cut profit by $16.4 million.

Sales at stores open at least a year fell 5.5% because of “weak” video and game releases during the quarter, the company said. Movie Gallery bought Hollywood Entertainment in April to compete with No. 1 Blockbuster.

Shares of Movie Gallery fell $1.09 to $20.27.