Was It Really So Bad At Blockbuster This Quarter? – A Look Behind the Headlines

For the 1st quarter Blockbuster reported a net loss of $49.2 million compared to $4.7 million in last year’s 1st quarter.  Gross margins decreased 480 basis points to 51.7% from 56.5% in last year’s first quarter. 

So, predictably, the stock got hammered – the stock was down 81 cents or 13% to $5.40. 

But if you look beneath the headlines a different picture emerges.  Net loss was up and operating cash flow loss was as well because they spent more money as their online business, due to Blockbuster Total Access, ramped up. 

In the 1st quarter they added 800,000 online subscribers.  Netflix added only 481,000 (see pgs 2 and 8 ) due to the tremendous appeal of Blockbuster Total Access.  That’s right: Blockbuster added way more online subscribers in the 1st quarer than Netflix did.

Because they are growing the online business so fast, expenses and investment in that business were up.  “Cost of Rental Revenues” was up $55.5 million, 15.5%, “due to purchases of additional rental product in order to support in store exchanges resulting from additional traffic generated by the significant growth of Blockbuster Total Access.” 

They also spent $35 million on an advertising campaign that I’m sure we’re all familiar with by now (“A Brief History of Online DVD Rental”, etc….). 

In addition, as far as operating cash flow goes, the biggest factor in the large loss was a -$175.7 million effect from changes in working capital.  That is, according to the press release, they paid down some outstanding “Accounts Payable” and “Accrued Expenses”.  Excluding changes to working capital free cash flow was a positive $20.7 million.

Here are some other interesting results of their ongoing restructuring: they paid down about $63 million in debt, cut “General and Administrative Expenses” by $13 million, closed 159, about 2%, of their stores and sold their UK-based Gamestation retail operation for $150 million. 

Could Blockbuster’s evolving combination online and physical store model actually be viable?  No way say the Kool Aid drinkers over at the Motely Fool.  But I’m not so sure.  It seems to be working pretty well so far despite the appearances of today’s headline numbers.