Blockbuster stock drops on lower profit forecast

By David Lieberman
USA Today

NEW YORK — Investors hammered Blockbuster and other video renters yesterday after the No. 1 chain slashed its profit forecast, blaming stronger-than-expected competition from DVD discounters in this quarter.

Blockbuster shares plummeted 32 percent to $13.20 after the company said that earnings per share for 2002 could come in as low as $1.03, a slight improvement over 2001's $1.01 but far short of its earlier prediction of $1.31.

Viacom, which owns 82 percent of Blockbuster, reaffirmed expectations for double-digit earnings growth. Its shares fell 3 percent to $41.60.

Blockbuster CEO John Antioco said the chain, which does about 40 percent of all video rentals, saw a drop-off after Thanksgiving because of "the frenetic, frenzied activity of mass merchants selling highly collectible (DVD) titles below cost."

Studios have flooded the holiday market with hits including "Spider-Man," "Austin Powers in Goldmember" and "Ice Age." And many retailers — including drugstores, electronics chains and discounters such as Wal-Mart — use them as loss leaders. They sell the DVDs for as little as $15, even though they typically wholesale for more than $17.

Investors fear video chains will be left behind as consumers build DVD libraries. About 37 million homes will have DVD players at year's end, up 54 percent from 2001, Adams Media Research says. And they will spend about $8.1 billion to buy discs in 2002, up 50 percent from 2001. It will be about 65 percent of total video spending.

But unlike with books or records, the specialty store segment for videos is practically a nonplayer in sales, Adams Media's Tom Adams says. "They're set up to rent."

Blockbuster, which now accounts for less than 5 percent of all DVD sales, recently reconfigured its stores to emphasize discs that consumers can purchase.

Antioco says, though, that "our role is primarily rental." They deliver profit margins of more than 60 percent vs. about 20 percent for sales.

Others also said they still have faith in the core rental business.

Rentals "will continue to grow as a result of the higher quality of DVD and (we) have merchandised our stores accordingly," said Hollywood Entertainment CEO Mark Wattles. "Contrary to what is being assumed in the market, we anticipate reporting strong growth in our core rental business."

Still, Blockbuster's sneeze infected its top competitors. Hollywood Entertainment closed at $16.48, down more than 14 percent. Movie Gallery fell 17 percent to $15.05. And Internet rental service Netflix was down 13 percent to $11.

While each reaffirmed its financial guidance yesterday, Movie Gallery said that it "has experienced a similar trend" in slowing rentals and expects revenue to come in "at the low end of the range" it gave Wall Street.

Some analysts say that concerns about DVD sales should subside after the holidays.