Tuesday, September 15, 2009

Blockbuster accelerates its transformation (BBI)

AlphaNinja - Blockbuster (BBI), facing challenges of all sorts, filed an 8-k today illustrating some of its ideas for transforming itself in the years ahead.

Blockbuster had trouble competing even before the entrance of Netflix and Redbox, and now is in a serious fight for survival.

In the slide below, you can see the store-level economics they're dealing with. The 35% of the base called "core" stores are healthily profitable, accounting for 80% of EBITDA. Gross profit at those core stores runs about $520k, versus a company average $414k. The company is ramping up plans for store closures, which will focus on the unprofitable ones to start with, thus increasing the companywide average performance.

The second slide outlines VERY ambitious targets for future growth. To compete in the physical market versus Redbox, they want DVD kiosks to rise from about 500 units at present to 10,000 in just over a year! The end target for company-operated stores is not listed, but a smaller store base consisting of a higher percentage of "core" performers will drastically help profitability.

The uncertainties facing BBI are why estimates for 2010 earnings per share range from negative 22cents to +32cents. The high-end would justify more than a doubling of the shares, while the midpoint of 10cents would mean the shares are fairly priced here. Smart management should be able to close underperforming stores, while using their physical base to attack the Netflixes and Redboxes - we'll see if they do so.

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