Blockbuster Reports Slim Profit for Q4

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Blockbuster Inc. (BBI), the world's largest video rental chain, reported a slim profit for the fourth quarter Wednesday in contrast to a loss a year ago, but said it would restate certain financials to correct lease accounting errors. Its shares rose more than 6 percent.

The company also said Wednesday it has extended its nearly $1 billion offer for rival Hollywood Entertainment Corp. (HLYW) to March 24 from its prior expiration date of March 11.

The board of Hollywood Entertainment has told shareholders they should reject Blockbuster's bid in favor of a lower offer valued at about $900 million from a third video rental company, Movie Gallery Inc. It said there were "uncertainties and possible delays" in the Blockbuster offer that outweigh the higher price that Blockbuster is willing to pay.

Blockbuster shares rose 33 cents, or 6.1 percent, to $9.25 on the New York Stock Exchange. Its shares have ranged from $6.50 to $18.24 in trading over the past 52 weeks.

In its earnings report Wednesday, Blockbuster said it earned $900,000 in the three months ended Dec. 31 versus a loss of $1.19 billion, or $6.57 per share, a year ago. Excluding share-based compensation, the company earned $12.3 million, or 7 cents per share, in the latest quarter, down from adjusted profit of $58 million, or 32 cents per share, last year.

Revenue increased 6.3 percent to $1.72 billion from $1.62 billion in the fourth quarter of last year. Total worldwide same-store revenue were flat with the year-ago period, as strong retail same-store sales growth was offset by declining same-store rental revenue.

Analysts surveyed by Thomson First Call were looking for the company to post earnings of 4 cents per share on sales of $1.63 billion in the latest quarter.

Chairman and CEO John Antioco said, "We are especially delighted with the rapid growth of our online business, which, in just seven months, has built a base of more than 750,000 subscribers. Based on our initial success in this area, we are accelerating our investment in Blockbuster Online, with a goal of achieving more than 2 million subscribers by the first quarter of 2006."

In a conference call with financial analysts, Antioco noted that several states are examining whether the "No Late Fees" program — and the automatic sale of rented videos kept beyond a due date — that it began in January constitutes a deceptive trade practice.

The New Jersey attorney general already has filed suit against Blockbuster on that score.

"We're working closely with the AG's and are open to any suggestions they have about explaining our program better," Antioco told the analysts.

In 2006, Blockbuster plans to launch online video on demand, Antioco said.

While the investments in the in-store and online subscription service may hurt first-quarter profits this year, the longterm benefits could be substantial, said Larry Zine, Blockbuster executive vice president and chief financial officer, told the analysts.

"With the additional investments we are not only setting up our core business for future success and setting up Blockbuster for significant profit improvement for 2006, we are well-positioned for substantial and profitable growth in our online business," he said.

Blockbuster also said in its earnings statement that it is reviewing the company's lease accounting policies, and has identified technical errors in accounting practices related to leasehold improvements. After evaluating the impact of the errors, Blockbuster said it intends to restate some previously issued financial results.

Looking ahead, Blockbuster said it expects 2005 revenue to grow by a low-single digit percentage over 2004 revenue of $6.05 billion, as a result of increased active members and growth in the store base.

The company forecasts that 2005 operating income will be flat year-over-year before about $50 million of initial marketing and implementation costs associated with the launch of the "No Late Fees" policy and about $40 million in share-based compensation expense.

However, first-quarter operating income will be reduced by about $80 million in projected income from extended viewing fees, about $60 million in operating costs for Blockbuster Online, and $50 million in launch costs for "No Late Fees."