Blockbuster Warning Dims DVD Case at Video Chains

Blockbuster BBI sent video rental stocks reeling on Wednesday.

The nation's largest video retailer let fly a major revenue and earnings shortfall Wednesday morning, prompting a selloff in its stock and in other publicly traded video retailers, and raising questions about the outlook for the industry.

Though Blockbuster attributed the shortfall to factors "unique to this holiday season," investors were forced to consider whether the problem is the rental giant's new focus on DVD sales, or if in fact Blockbuster's unfortunate event results from some larger, industry-threatening trend -- a possibility raised by a statement issued later Wednesday morning by one of Blockbuster's competitors.

In fact, the collapse may illustrate the limitations on the "cocooning" approach to investing -- the thesis that a tense global situation and a dim economic outlook translate into a bullish outlook for stocks linked to consumers' home-based, family-oriented activities.

Many investors were taking a broad, pessimistic view on Wednesday. With Blockbuster down $5.67, or 29%, to trade at $13.73, other video store chains suffered, too. Movie Gallery MOVI, which reaffirmed earnings guidance Wednesday morning after Blockbuster's announcement, dropped 15% to $15.35. Hollywood Entertainment HLYW was down 17% to $16.

NetFlix NFLX, the online-based DVD rental company, dropped 14% to $10.96.

Drop Shot

In a statement issued Wednesday, Blockbuster said fourth-quarter earnings would come in a range of 15 to 22 cents per share -- half, at best, of the 44 cents that analysts had expected, according to Thomson Financial/First Call, and below the 35 cents reported in the fourth quarter of 2001. Instead of the fourth-quarter same-store percentage revenue growth in the low- to mid-teens that Blockbuster had expected, the increase in same-store sales will be in the high single digits. The expected gross profit dollar percentage gains are falling from the mid- to high-single digits to the low ones.