Blockbuster Q2 Loss Worse Than Expected; Outlook Gloomy

Movie rental chain Blockbuster Inc. (BBI) on Tuesday posted a quarterly loss that was more than double Wall Street's forecast as lackluster new video releases failed to attract consumers.

The largest U.S. home video and DVD rental company also said it was no longer on track to meet its 2005 financial forecast and said it has reached an agreement with creditors to waive certain debt covenants for the second and third quarters. Without the waiver, the company would have been in default, Blockbuster said.

Also Tuesday, Blockbuster said it was raising the monthly fee for its online service. The price of a three-movie plan will rise to $17.99 from $14.99 as of Aug. 19, bringing it in line with Netflix Inc.'s (NFLX) price.

Blockbuster has been spending heavily to build an online service to compete with Netflix, while its business has also been hit by consumers buying videos at retailers like Wal-Mart Stores Inc. (WMT) rather than renting.

But the online business is less profitable than store rentals, Stacy Widlitz, analyst at Fulcrum Global Partners said.

"They are stuck in a Catch-22," Widlitz said of the online business. Blockbuster can either raise online fees and risk losing subscribers to Netflix, or "just continue to lose a lot of money at it."

The company has been hurt by a 19-week Hollywood box-office slump during the spring and summer that is now working its way into the rental market. The company said industry weakness should continue in the third quarter before the video release schedule improves in the fourth quarter.

Blockbuster posted a loss of $57.2 million, or 31 cents a share, for the second quarter, compared with a profit of $48.6 million, or 27 cents a share, a year earlier.

Excluding severance costs, asset impairment charges and stock-based compensation, the loss was 22 cents a share. On that basis, analysts were forecasting a loss of 10 cents a share, according to Reuters Estimates.

Revenue fell 1.6 percent to $1.40 billion. Sales at stores open at least a year, a key measure for retailers, fell 4.7 percent.

The declines were largely the result of the company's decision to eliminate late fees on video rentals, which cut into overall revenue.

The plan appears to be attracting more business, as rental transactions rose 10.4 percent in the quarter, Blockbuster said.

Still, "the bottom line is you just wiped out 15 percent of your top line (by eliminating) late fees, so giving us metrics excluding that is not all that relevant," Widlitz said.