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.
Strong rental growth in the early fall "slowed significantly" starting with Thanksgiving, said Blockbuster chief executive John Antioco in a statement. The slowdown is largely due to one-time factors "including the unprecedented number of movie titles available for sale at deeply discounted prices, this year's DVD gift-giving phenomenon and a compressed holiday season which has limited consumers' leisure time," Antioco said. "We believe the degree of the impact on rental should be temporary, although we will be in a better position to evaluate this when more normal conditions return during the first quarter of next year," Antioco said. Unfortunately for the video retail business, the slowdown goes beyond Blockbuster. In its statement Wednesday, Movie Gallery said it had suffered a similarly unexpected dropoff in business in the three weeks after Thanksgiving, and that its same-store sales increase is falling at the low end of prior guidance.
separately argues that Movie Gallery will have to make a major inventory writeoff, said he was covering most of his short position in the stock Wednesday. "The stock moves in extremes," the short-seller said. "We might get back into our position at a higher price." Meanwhile, Blockbuster and Movie Gallery noted that the remaining two weeks of the year traditionally have a major impact on business, leaving open the possibility that results could differ from Blockbuster's new expectations. Blockbuster says it will update 2003 guidance early in the new year.