Blockbuster's Bargains Kill Its Margins

I didn't hear anything on Blockbuster's (BBI Quote - Cramer on BBI - Stock Picks) earnings conference call Wednesday to make me change my bearish stance. Though the video-rental chain is adding customers at an impressive rate, the cost of its Total Access program is crushing margins.

In the first quarter, Blockbuster's gross margin fell 480 basis points. Rental margin slid 540 basis points. Operating income turned negative due to higher advertising and promotions. The company's cost structure benefited from closing 159 net stores.

Blockbuster this morning reported a first-quarter net loss of $46.4 million, or 26 cents a share, which was wider than the $1.9 million, or 3-cent per-share, loss it recorded in the same quarter last year. Revenue, however, rose 5.4% to $1.47 billion. Analysts were looking for a less severe loss of 16 cents a share on $1.37 billion in revenue, according to Thomson Financial.

The company's shares are down 70 cents, or 11.3%, at $5.51 in recent trading.

In my previous column on Blockbuster, I argued that the company's Total Access program -- an online subscription service that allows customers to return and receive their rentals online or in-store -- will hurt margins. However, if the company raises subscription prices, it risks alienating customers.

On the conference call, management implied there will be no price hike, stating that the only changes to the program will be on the cost structure. As Total Access continues to ramp, the margin deterioration should slow, but I don't expect it to cease all together.

« Previous Page

1 2 3

Next Page »