More Blockbusters to close
Blockbuster is looking lackluster.
Facing increasing pressure from Redbox, Netflix Inc. and its own debt problems, the video rental giant is doubling the number of stores it is likely to close by the end of next year, the company revealed in a regulatory filing Tuesday.
Struggling Blockbuster was previously aiming to shut 410 to 450 of its most unprofitable stores this year and next. A series of “accelerated closures” brings that target to 810 to 960.
Blockbuster also said it might convert an additional 250 to 300 locations to outlets that focus on used DVDs. That means 1,060 to 1,260 of Blockbuster’s stores will probably be shut down or transformed by next year.
There are 4,356 Blockbuster locations throughout the country, meaning 24% to 29% could be closed or altered within 16 months.
About 18% of Blockbuster’s stores are unprofitable, and 47% are only mildly profitable, according to the filing. A core 35% of the company’s locations provide 80% of its retail profit.
The accelerated store closures were triggered by a series of changes Blockbuster made to its debt agreements, which have squeezed its capital and forced it to cut back on marketing and in-store stock this year.
On Monday, Blockbuster announced it was issuing $340 million of secured notes, most of which would be used to pay down an existing line of credit that carried more onerous short-term payments. That triggered changes in its agreements with debtors that included permission to go through with several changes that have been sought by investors, including the store closures.
“They bought themselves time, and as long as the store closings are intelligent, they’ll do OK,” said Michael Pachter, an analyst at Wedbush Morgan Securities.
There’s a danger, however, that Blockbuster’s retrenchment could provide openings for its competitors.
“Every store they close is an opportunity for Redbox to go to a landlord and say, ‘Let us put in a box,’ ” Pachter said. “But if they can capture some of the revenue in other stores, they will have much better [profit] margins.”
Cash from the closures and renegotiated debt should help Blockbuster operate its remaining stores more effectively. In the first half of this year the company was not able to make as many discs available in stores as it would have liked, Chief Executive Jim Keyes said in a conference call with Wall Street analysts last month.
Blockbuster estimates that it will save $30 million from avoiding ongoing losses at the stores it is looking to close and that $20 million to $30 million of existing revenue from those locations will transfer to others.
In addition, the company said it would get a one-time benefit to its working capital of $26 million. Terminating the leases from the stores it is shutting will cost $60 million, however.
Blockbuster also said it was seeking to alter lease terms at 275 to 300 of its stores.
With its heavy reliance on retail stores that are increasingly unpopular with consumers, Blockbuster has struggled despite an 8.3% rise in overall U.S. DVD rental revenue during the first half of the year.
In the second quarter it lost $39.7 million and saw its revenue decline 22% while competitors Netflix and Redbox reported that their revenues grew 20% and 110%, respectively.
Blockbuster is responding by expanding its rental businesses outside of the physical stores, including digital downloads, Netflix-style mail rentals and retail kiosks that compete with Redbox. As part of a partnership with NCR Corp., Blockbuster is planning to expand from 497 kiosks to 2,500 by the end of this year and to 10,000 by mid-2010.