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No rave review for this Blockbuster


Dear Mr. Berko:

I have two questions for you. Many others and I feel we need a change at the White House and we are supporting Hillary Clinton as a presidential candidate for next year. We feel that she will better represent the middle class, the largest group of voters; therefore, she will be better for the economy and the stock market. Please give me your opinion.

My second question concerns Blockbuster Video. I put $2,000 in my Independent Retirement Account last year and bought 70 shares of Blockbuster at $27.50 and, as you know, the stock sells at about $15 a share today. What’s wrong with this stock? Should I sell it or should I buy more shares with my 2003 contribution?  G.W., Moline, Ill.

Dear G.W.:

This column doesn’t do politics, except to laugh at politicians’ power ties, poorly fitted hairpieces and their sense of self-importance. In my opinion, the economy and the stock market will do what it’s supposed to do when it’s supposed to, no matter which political party controls Congress or the White House. I do not favor one candidate over another and have no right or left political opinion.

Blockbuster Video (BBI-$15.37) rents more home videos, DVDs and video games, and generates more revenues, than its 10 largest competitors combined. And last year BBI clocked $5.5 billion in rental revenues from 4,900 U.S. stores, 2,100 foreign locations and 1,800 franchise/joint venture units. That’s 4 million movies and games a day, and BBI has certainly earned its reputation as the mecca for America’s couch potatoes.

In 1994 Viacom (VIAB-$35.93) bought all the outstanding shares of BBI and, in 1999, sold 19 percent via an initial public offering at $15. It’s still $15 today. That’s what I call capital preservation.

Unfortunately, according to Standard & Poor’s, BBI hasn’t earned a Euro since going public again and has lost more than $2 billion over the last five years. The future does not look sanguine.

BBI recently reported lower fourth-quarter revenues, which it blames on consumers purchasing lower-priced DVDs and videos at discount retailers. So CEO John Antioco has decided to enter the retail sales market to go toe to toe with Costco, Target and Wal-Mart.

BBI might be able to challenge Costco, but the $220 billion Wal-Mart will bite off BBI’s head as Target slowly drains its blood, forcing BBI to shut down, store by store. Antioco must be getting business advice from the Blues Brothers or Abbott & Costello.

BBI earns staggering profit margins of 65 percent on its rental business, but only 12 percent to 14 percent on retailing videos and DVDs. Antioco may be making a fundamental mistake to focus BBI’s revenues on retail sales with such low margins. This is a classic mistake of stepping over dollars to pick up dimes. It feels like a bad decision with potentially bad results since 84 percent of BBI’s revenues derive from rental income.

But to his credit, Antioco has reduced BBI’s long-term debt in the past three years from $720 million to $330 million, and he expects to pay the remaining debt off in the coming 18 months. In the past three years, Antioco has opened more than 1,300 new, brightly lit BBI units across the nation.

I must also credit Antioco, who, in a masterstroke, used BBI’s clout to renegotiate deals with Hollywood studios. Up until late 1997, the studios were charging BBI $65 per movie, which was the same price smaller video chains were paying. BBI now pays between $22 and $25, and this is nicely reflected in the company’s gross profit margins.

I don’t have a solution for BBI’s problems. I am concerned about the fast growth of DVD sales and the negative impact they are having on the video rental business. Almost half of the TV households in the United States own a DVD and DVD sales will continue to grow at a rapid rate. I recommend that you sell your 70 shares. BBI is in a transition period reflecting a shift in product demand and that makes me nervous. I think the shares could fall lower.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.

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