Wedbush: Blockbuster's Q4 and beyond

[orbitdvd]

Has anybody read what Redbox is forecasting?

I sure that they are also looking at the MG/HV closures as well. With a few well placed vending machines they could capture a large portion of a closed store's business. Once again, BBV has failed to recognize a competitive trend (kiosks) that they could have easily captured the market on.


All in all I like Keyes' performance so far. He is more of a realist than an egotist.


marc

[HelloItsMeMOM]

Interestingly, Redbox does not charge late fees. Once you return the video your card is charged $1 for each day you keep it.

So ... they beat BB at its own game ... lol

All Redbox has to do is as Marc says, they don't need a big space and lots of equipment.

Redbox will come out the winner this time. Hmmm ... I wonder if grocery store chains are selling gift cards for Redbox yet?

[zooworker]

Originally Posted by orbitdvd

Has anybody read what Redbox is forecasting?

I sure that they are also looking at the MG/HV closures as well. With a few well placed vending machines they could capture a large portion of a closed store's business. Once again, BBV has failed to recognize a competitive trend (kiosks) that they could have easily captured the market on.


All in all I like Keyes' performance so far. He is more of a realist than an egotist.


marc

Need a few in my area, (joking) they wouldn't last long. Someone would figure out how to break into it. Nice area I am in

[DavidNewlySL]

Originally Posted by zooworker

Need a few in my area, (joking) they wouldn't last long. Someone would figure out how to break into it. Nice area I am in

Yeah, they would break into it, then try and stand outside of my store and sell them to people

[netflix_got_blockbusted]

Originally Posted by netflix_got_blockbusted

Blockbuster can achieve 2008 EBITDA of $390MM, based on a $145MM EBITDA run-rate along with the following improvements:

(A) Reduced ad spending ($43MM YOY EBITDA benefit).

(B) Reduced losses from Total Access ($75MM YOY EBITDA benefit).

(C) SG&A savings ($35MM YOY EBITDA benefit).

(D) New retail iniatives ($50MM YOY EBITDA benefit).

(E) Benefit from Movie Gallery closures ($45MM YOY EBITDA benefit).

Quick post-Q4 follow-up.

This was an amazing quarter, easily Blockbuster's best quarter in over 3 years. Blockbuster outperformed on every important metric: Revenue, Gross Profit, EBITDA, in-store performance, debt paydown, etc.

It's amazing that Jim Keyes was able to produce such a great quarter given that he's only been on the job for 8 months. Jim Keyes seems like a superstar, and this bodes very well for Blockbuster's future.

And note that Blockbuster benefited only marginally in Q4 from MG/HV store closures. MG store closures began on 9/25, with liquidation sales lasting through October. The full impact of the first 520 closures will be realized in Q1, while the full impact of the additional 400 closures will be realized starting in Q2. In other words, Blockbuster's performance should continue to improve as MG afterburners kick in.

Also note that in a research note released on 3/7, Wedbush estimates that MG could close an additional 1,000 stores. These continued closures will add plenty of fuel to Blockbuster's fire.

Finally, while it was nice to see positive analyst comments (Citi, Wedbush, Sterne, BMO), it's even nicer to see Jim Cramer get on board. Cramer will get momentum players into BBI, and these players were instrumental in getting BBI to $7+ last year.


Here are some post-Q4 analyst quotes:


Wedbush Morgan, 3/7/08 research note

• The "tailwind" from Movie Gallery store closings should bolster same store sales at Blockbuster, and the pace of store closings should accelerate in the spring.
  
  
• We believe that the impending closure of as many as 1000 Movie Gallery stores will allow Blockbuster to improve performance at a large number of its stores.
  
  
• While we agree that digital downloads will be widely available in the future, we think that the collective wisdom of the movie studios will ensure that delivery is not proximate to DVD release, in order to protect the immense profitability of that delivery channel. As long as there are profits from DVD sales, it is highly likely that DVD rental will continue to survive.
  
  
• It is still important for the company to resolve its pricing issues, with the current in-store customer offered a seven-day rental for around $4. Blockbuster intends to shorten this period and to implement some type of "per day" pricing, which could grow its revenues or improve its inventory situation. Both of these would be a positive result.
  
  
• We view the company's EBITDA guidance [$290MM to $310MM] as a floor. The company's EBITDA guidance could quite easily have been $75 million higher, suggesting that it could earn as much as $0.40 per share in 2008. At that level, we believe that Blockbuster shares would substantially appreciate.

Sterne Agee, 3/7/08 research note

• Management provided 2008 EBITDA guidance of $290-$310 million compared to the street's estimate of $264 million. We believe management's guidance is realistic, if not conservative given the turnaround in the online business ($100 million positive EBITDA impact y-o-y), expanded overhead reduction plan ($80+ million positive EBITDA impact y-o-y in 2008).
  
  
• In-store pricing tests continue. There is no urgency for a nationwide rollout as existing model is profitable.

[HelloItsMeMOM]

Originally Posted by zooworker

Need a few in my area, (joking) they wouldn't last long. Someone would figure out how to break into it. Nice area I am in

You have to move to a better area, Zooie Seriously, there are plenty of these inside stores where they are safe. I still think they will come out the winner.

[IVR]

[quote=netflix_got_blockbusted;271227]Quick post-Q4 follow-up.

This was an amazing quarter, easily Blockbuster's best quarter in over 3 years. Blockbuster outperformed on every important metric: Revenue, Gross Profit, EBITDA, in-store performance, debt paydown, etc.

It's amazing that Jim Keyes was able to produce such a great quarter given that he's only been on the job for 8 months. Jim Keyes seems like a superstar, and this bodes very well for Blockbuster's future.

Ummm do you think that BlockBuster having a 14 week Q4 instead of the traditional 13 week Q4 might have helped get those fantastic results

IMO it will be very difficult for BB to rise much in a sinking stock market

Time will tell but I think BB has 2-5 years before they follow Movie Gallery into bankruptcy

[HelloItsMeMOM]

Originally Posted by IVR

Ummm do you think that BlockBuster having a 14 week Q4 instead of the traditional 13 week Q4 might have helped get those fantastic results

IMO it will be very difficult for BB to rise much in a sinking stock market

Time will tell but I think BB has 2-5 years before they follow Movie Gallery into bankruptcy

I agree with you.

[netflix_got_blockbusted]

Originally Posted by IVR

Ummm do you think that BlockBuster having a 14 week Q4 instead of the traditional 13 week Q4 might have helped get those fantastic results

While it's true that there's an extra week in the quarter, it's a non-issue.

Revenue is the metric most impacted by day count. But even after adjusting for day count (and store count) Blockbuster's revenue outperformed last year by 2.6%. And the outperformance is similar for every other important metric that I mentioned.

Can you point to a metric that would look substantially worse if you took away the extra week?

Originally Posted by IVR

Time will tell but I think BB has 2-5 years before they follow Movie Gallery into bankruptcy

I respect your opinion, but Blockbuster is no Movie Gallery. Have you ever taken a detailed look at Blockbuster's financials?

Looking at its debt paydown makes clear that Blockbuster is a cash cow despite wasting hundreds of millions on EOLF and a mis-priced Total Access.

12/31/2005: $1,158 million debt
12/31/2006: $984 million debt (15% YOY debt reduction)
12/31/2007: $758 million debt (23% YOY debt reduction, helped by the Gamestation sale)
12/31/2008: under $600 million (my guess)

Blockbuster's debt burden continues to decrease while its EBITDA-generating ability continues to increase. Blockbuster's 2007 EBITDA was $180 million while its 2008 EBITDA guidance is $300 million. And analysts are calling the $300MM guidance a low-ball.

In addition, as debt gets paid down money that used to go toward interest payments can begin to be used on other things.

2006: $102MM interest expense
2007: $89MM interest expense (due to lower debt burden)
2008: $75MM interest expense (based on guidance)

In other words, Blockbuster can take $14MM that last year went toward interest expense and instead use the money on other things (like additional debt reduction).

Wedbush seems to agree with my assessment, stating in its 3/7/08 research note that "We think that bankruptcy risk is nil".



Overall, I agree with Jim Keyes that a lot of Blockbuster's past pain was self-inflicted, as a result of EOLF and a mis-priced Total Access. Correcting these two mistakes, along with cutting advertising a bit, cutting SG&A a bit, and introducing new retail iniaitives adds up to lots of extra EBITDA, which can be used to both reduce debt and fund growth. My guess is that Q1 results will drive the point home.

[CreepyNormal]

Originally Posted by netflix_got_blockbusted

[*]While we agree that digital downloads will be widely available in the future, we think that the collective wisdom of the movie studios will ensure that delivery is not proximate to DVD release, in order to protect the immense profitability of that delivery channel.

Well, Warner Bros. releases their movies on On Demand and other PPV services at the same time as DVD, and they've managed to make money (at the expense of Blockbuster, who now has to get all WB movies for a dramatically increased price or else not carry them i.e. the ridiculously low copy depth we've seen on Assassination of Jesse James and The Brave One, among others).