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Bankruptcy Is Blockbuster's Only Hope

Stocks in this article: BBI

Blockbuster has provided little confidence that it will be able to recover on its own and it's debt load isn't its only issue. Last month, the video rental company reported a fourth-quarter loss of $434.9 million, or $2.24 a share, as same-store sales fell almost 16%. This dour result came as a majority of the retail industry began to recover.

Bearing these numbers in mind, it should hardly come as a shock that Blockbuster is mulling filing Chapter 11. Yet, just two weeks ago Keyes told CNBC that the company has a "bright future," which sent the stock surging.

Keyes reiterated this optimistic sentiment on Thursday, telling the Dallas Business Journal that despite the SEC filing Blockbuster's situation hasn't changed dramatically over the past year. He called the filing "routine" and similar to other ones the company has had in the past.

No one can say Blockbuster isn't trying. Over the past several years, the company has shuttered underperforming stores, cut costs and rolled out kiosks in an effort to compete with Netflix (NFLX) and Coinstar's (CSTR) Redbox.

"There's a role for physical stores to play in video distribution," Wolf says. "And Blockbuster's plan to close underperforming stores is spot on."

Earlier this week Blockbuster also announced that it's in talks to divest its European unit.

The company has also said that it will reduce its costs by $200 million this year.

Still, no matter what the company does, there is always the looming shadow of debt and interest burden, which was caused by the special dividend Blockbuster was forced to pay when it was spun out of Viacom (VIA) in 2004.

"A voluntary Chapter 11 would enable Blockbuster to reduce its debt burden and interest payments to manageable levels and allow it to implement its strategy for closing underperforming stores and building a digital distribution business," Wolf says. "I can see why management is contemplating it."

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