Research Roundup: More Bad Reviews for Blockbuster
Is there anybody not invested in Blockbuster (BBI) in one way or another who thinks the company’s long-term survival strategy is going to work?
Announcing a $435-million quarterly loss the company said that “stores remain a key component of our multi-channel offering,” while simultaneously announcing that it closed 374 company-owned domestic stores in 2009, and expects 500 or more closures this year.
Through the Company’s alliance with NCR (NCR) BBI says it will add an additional 7,000 Blockbuster Express kiosks and expect to have at least 10,000 by 2010 year end and will expand its video-by-mail and digital offerings.
Will this be enough to fend off growing competition from the likes of NetFlix (NFLX), Coinstar’s (CSTR) Redbox and now Wal-Mart’s (WMT) Vudu, as well as competitors such as Apple’s (AAPL) iTunes? As we’ve written before, we have our doubts, as do a growing number of analysts.
Janney Capital analyst Tony Wible today downgraded the shares to Sell, cutting his price target to 15 cents, from 75 cents, Eric Savitz at TechTrader Daily reports. “The accelerated loss of market share, lower cash balance, lack of guidance, and restructuring efforts that could entail significant equity dilution raises concerns surrounding liquidity and/or dilution,” he writes. “We are uncomfortable taking these risks in the face of the volatile media landsacpe.”
Wedbush analyst Michael Pachter repeated his Neutral rating and 75-cent target price. But he also had some ominous words about what could happen here. “”Even if Blockbuster is able to survive competition from Netflix, Redbox, NCR and others, it is burdened by over $700 million in net debt and net interest expenses of over $100 million annually,” he writes. “Should the company’s EBITDA run-rate of ~$200 million annually decline further, we question its ability to repay the principal on its debt and continue as a going concern.”
BMO Capital analyst Jeffrey Logsdon repeated his Market Perform rating, but trimmed his target to 30 cents, from 40 cents; he says that traditional EV/EBITDA valuation “implies no equity value,” but keeps the non-zero price target to reflect “an option on BBI’s brand.”
The Wall Street Journal reported yesterday on BBI’s plans to remake itself, but it seems unlikely that picking up assets from defunct Hollywood Video stores will bring much relief.
Moody’s doesn’t seem to think so. The ratings agency commented on Feb 8 on the bankruptcy filing of Hollywood’s owner Movie Gallery and the closing of around 760 stores in the U.S. “Although on the surface it would appear that these store closings would help Movie Gallery’s main competitor, Blockbuster, we don’t expect this to be the case.”
“In fact, we believe that Movie Gallery’s bankruptcy filing has negative credit implications for Blockbuster as it shows that the shift away from bricks-and-mortar video rentals is accelerating, one of the long-term concerns factored into Blockbuster’s Caa1 credit rating.”
We expect that lost sales from Movie Gallery’s closed stores will mainly migrate to other channels of distribution and not to Blockbuster’s retail stores. However, we think Blockbuster will be able to combat a portion of this shift with its multi-distribution strategy, which includes online rentals, DVD-vending kiosks and digital-on-demand distribution. - Moody’s
Standard & Poor’s downgraded BBI to CCC with a Negative Outlook on Feb 17 saying it “believes performance will remain very challenged. Our concern is that Blockbuster will not be able to transform its business model over the near term, as we had expected, given the competitive pressures in the rapidly evolving domestic media entertainment industry.”
Needham & Co. analyst Charles Wolf expressed skepticism that Blockbuster can realize enough value from new business offerings in time to offset declines at its traditional brick-and-mortar outlets (WSJ).
“If they can’t build a profitable stores operation, then there is no Blockbuster. It’s real simple,” Mr. Wolf said. If traffic doesn’t pick up by mid-year, “we may just kiss this whole story good-bye. We got a dead-man-walking situation here.”
The WSJ reported that in recent days, Blockbuster tapped law firm Weil, Gotshal & Manges and investment bank Rothschild Inc to “explore more strategic options but do so outside of bankruptcy.”
Sounds like a tall order. There will be a market for physical DVDs and games for some time, but we don’t believe it will be large enough to support a network of standalone stores for much longer.
Blockbuster’s Conference Call Transcript
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