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| BBI > SEC Filings for BBI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 6, 2008, as well as our reports on Forms 10-Q and 8-K and other publicly available information.
Restatement of Financial Statements
We have restated herein our consolidated financial statements for the thirteen and thirty-nine weeks ended September 30, 2007 to correct errors in such consolidated financial statements. See Note 2 to the consolidated financial statements for more information regarding the impact of the restatement on our consolidated financial statements.
Overview
Blockbuster Inc. is a leading global provider of in-home rental and retail movie and game entertainment, with over 7,500 stores in the United States, its territories and 21 other countries as of October 5, 2008. We also offer rental and retail movie entertainment through the Internet and by mail in the United States.
While the overall media entertainment industry has remained stable over the past few years, it has experienced a channel shift primarily driven by the emergence of new methods of distribution. Recognizing that shift, we have broadened our focus beyond DVD rental to providing convenient access to media entertainment across five channels of distribution:
• In-store
• By mail
• Vending and kiosks
• Online, and
• At home (direct to the TV)
In the third quarter of 2008, we have continued to build on the series of actions we took during the second half of 2007 and first half of 2008 that were designed to both improve short-term profitability and position us to achieve our strategic objectives.
• Leveraging and growing our leadership position in the movie and game rental business-These changes include greatly enhanced product availability of new releases (including our continued expansion of Blu-ray), simplifying pricing terms, improving customer service, obtaining exclusive content and innovatively merchandising our product offerings. Additionally, we are currently testing a number of new store prototypes ranging from a refreshed and modernized look and feel of a typical BLOCKBUSTER® store to Rock-the-Block stores that emphasize gaming, beverages and snacks and video-enabled electronic devices.
• Developing new retail opportunities-We are leveraging our leadership position in the rental market to increase sales of movies, games and other complementary entertainment-related products by cross-merchandising retail and rental product in high-traffic areas throughout our store base. We also have broadened our product assortment to include Blu-ray, and have completed a roll out of games software, hardware and accessories in all our U.S. corporate-owned stores during the second quarter of 2008.
• Enhancing digital distribution-We have launched digital downloading on blockbuster.com that enables our customers to download entertainment content for both rental and purchase. We are also in the process of testing digital delivery through kiosks in our stores to digitally deliver entertainment content to our customers' portable devices.
Key Financial Points for the Thirteen Weeks Ended October 5, 2008
• Revenues were negatively impacted by:
• the closure or sale of 4.2% of our company-operated stores during the last four quarters,
• the Olympic games drawing the focus of customers, and
• a weak movie and game release schedule.
• By-mail revenues decreased 21.5% over the prior year.
• Same-store revenues increased 1.9% over the prior year.
• Net loss improved $16.6 million over the prior year.
Outlook
While we continue to be committed to improving our financial results through the operational and strategic initiatives discussed above, due to the recent extraordinary and unexpected limitations in domestic and international capital and credit markets, we may temporarily defer or scale back our spending on certain of these initiatives while we take prudent actions that are intended to provide that cash on hand and cash from operations will be sufficient to fund our cash requirements. These actions include, but are not limited to, adjusting capital expenditures and inventory levels, evaluating expenditures for strategic initiatives and continuing to implement ongoing cost controls. We intend that any such actions will remain in effect only until such time as improvements in the capital and credit markets provide additional options for sources of financing. Additionally, we continue to consider options for divesting certain non-core assets, including selling and/or licensing some of our international operations.
If we are unable to refinance our revolving credit facility or obtain other financing, we will be required to fund our business and operations without outside capital. There can be no assurance that we will be able to obtain adequate financing on acceptable terms or at all, and there is no guarantee that we will be able to fund our business and operations without outside capital. If we are required to fund our business and operations without outside capital, we will have to significantly reduce our spending and limit certain operational and strategic initiatives.
We believe that the continued consolidation in the home-video rental industry, expansion and growth of Blu-ray players and content, and a weakened economy in the U.S. will have a favorable impact on our 2008 results for the remainder of the year. However, there can be no assurances that conditions currently affecting the worldwide economic environment and other macroeconomic factors that could influence consumer confidence and spending behavior will not adversely affect our anticipated results of operations or further alter our strategic objectives.
See Note 3 to the consolidated financial statements and the Liquidity and Capital Resources section of MD&A for additional information.
Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we assess goodwill and intangible assets with indefinite lives for impairment at the reporting unit level annually as of October 31 and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. An impairment may be triggered by, among other factors, declines in the media entertainment industry, a reduction in our profitability, or a sustained decline in our stock price. The market price of our class A common stock has been subject to substantial volatility over the first three quarters of 2008 and is currently trading at historically low prices. Consequently, if our stock price does not increase in the near term, we may need to recognize a non-cash impairment charge as a result of our annual impairment test. Our goodwill balance totaled $770.7 million as of October 5, 2008. Any required non-cash impairment charge could significantly reduce this balance and have a material impact on our reported financial position and results of operations.
Results of Operations
The following table sets forth unaudited consolidated results of operations and
other financial data:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 5, September 30, October 5, September 30,
2008 2007 2008 2007
(As restated) (As restated)
Statement of Operations Data:
Revenues $ 1,204.6 $ 1,238.2 $ 3,903.2 $ 3,975.3
Cost of sales 561.3 568.0 1,863.0 1,907.8
Gross profit 643.3 670.2 2,040.2 2,067.5
Operating expenses 645.6 675.0 1,992.1 2,101.6
Operating income (loss) (1) (2.3 ) (4.8 ) 48.1 (34.1 )
Interest expense (17.9 ) (20.7 ) (55.5 ) (65.4 )
Interest income 0.5 1.3 2.2 5.1
Other items, net 5.8 (1.3 ) 6.1 (1.5 )
Income (loss) before income taxes (13.9 ) (25.5 ) 0.9 (95.9 )
Provision for income taxes (3.9 ) (8.7 ) (14.9 ) (20.2 )
Income (loss) before discontinued
operations (17.8 ) (34.2 ) (14.0 ) (116.1 )
Income (loss) from discontinued
operations, net of tax (2) - (0.2 ) (0.3 ) 1.3
Net Income (loss) $ (17.8 ) $ (34.4 ) $ (14.3 ) $ (114.8 )
Cash Flow Data:
Cash provided by (used for)
operating activities N/A N/A $ (101.1 ) $ (201.4 )
Cash provided by (used for)
investing activities N/A N/A $ (73.8 ) $ 86.0
Cash provided by (used for)
financing activities N/A N/A $ 88.7 $ (156.0 )
Other Data:
Depreciation and intangible
amortization $ 37.1 $ 43.5 $ 114.9 $ 142.0
Margins:
Rental margin (3) 63.4 % 62.0 % 61.4 % 59.9 %
Merchandise margin (4) 22.1 % 24.3 % 22.1 % 24.5 %
Gross margin (5) 53.4 % 54.1 % 52.3 % 52.0 %
Worldwide Data:
Same-store revenues (6) 1.9 % -3.7 % 3.9 % -4.3 %
Total stores at end of period 7,525 7,851 7,525 7,851
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Total Avg Sq. Total Sq.
Number Footage Footage
(in thousands) (in thousands)
Real Estate Data at October 5, 2008:
Domestic
Company-operated stores 3,909 5.5 21,675
Distribution centers 39 N/A 1,121
Corporate / regional offices 12 N/A 416
International
Company-operated stores 1,934 3.0 5,784
Distribution centers 7 N/A 177
Corporate / regional offices 7 N/A 90
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(1) During the thirty-nine weeks ended September 30, 2007, we recorded an $81.5 million gain on the sale of Gamestation.
(2) During January 2007, we completed the sale of RHINO VIDEO GAMES®. In accordance with SFAS No. 144, these operations have been classified as discontinued operations.
(3) Rental gross profit (rental revenues less cost of rental revenues) as a percentage of rental revenues.
(4) Merchandise gross profit (merchandise sales less cost of merchandise sold) as a percentage of merchandise sales.
(5) Gross profit as a percentage of total revenues.
(6) A store is included in the same-store revenues calculation after it has been opened and operated by us for more than 52 weeks. An acquired store becomes part of the same-store base in the 53rd week after its acquisition and conversion. The percentage change is computed by comparing total net revenues for same-stores at the end of the applicable reporting period with total net revenues from these same-stores for the comparable period in the prior year. The same-store revenues calculation does not include the impact of foreign exchange or our by-mail subscription revenues. The method of calculating same-store revenues varies across the retail industry; therefore, our method of calculating same-store revenues may not be the same as other retailers' methods.
Segments
We operate our business in two reportable segments: Domestic and International. We identify segments based on how management makes operating decisions, assesses performance and allocates resources.
• The Domestic segment is comprised of all U.S. store operations and by-mail subscription service operations in addition to the digital delivery of movies through blockbuster.com. As of October 5, 2008, we had 4,655 stores operating under the BLOCKBUSTER® brand in the United States and its territories. Of these stores, 746 stores were operated through our franchisees.
• The International segment is comprised of all non-U.S. store operations including operations in Europe, Latin America, Canada, Mexico and Asia. As of October 5, 2008, we had 2,870 stores operating under the BLOCKBUSTER® brand and other brand names owned by us located in 21 markets outside of the United States. Of these stores, 936 were operated through our franchisees. In the Republic of Ireland and Northern Ireland, we operate under the XTRA-VISION® brand name due to its strong local brand awareness. In Canada, Italy, Mexico and Denmark, we also operate freestanding and store-in-store game locations under the GAME RUSH® brand. During 2007, we sold our freestanding game locations which operated under the brand name GAMESTATION® and we retained 34 Gamestation locations that operate as a "store-in-store" within BLOCKBUSTER ® stores. Also during 2007, we sold our Australian and Taiwan subsidiaries coupled with master franchise licenses and terminated a franchise agreement in Brazil. Additionally, during the third quarter of 2008, we sold our Chilean subsidiary coupled with a license agreement. The results of Gamestation, Australia, Taiwan and Chile and franchise termination fees incurred in Brazil prior to disposal are included in continuing operations.
The following tables summarize income from continuing operations by business segment.
Domestic International Unallocated /
Segment Segment Corporate Total
Statement of Operations Data:
Thirteen Weeks Ended October 5,
2008
Revenues $ 812.5 $ 392.1 $ - $ 1,204.6
Cost of sales 363.5 197.8 - 561.3
Gross profit 449.0 194.3 - 643.3
Operating expenses 426.5 182.7 36.4 645.6
Operating income (loss) $ 22.5 $ 11.6 $ (36.4 ) $ (2.3 )
Thirteen Weeks Ended September 30,
2007 (as restated)
Revenues $ 834.2 $ 404.0 $ - $ 1,238.2
Cost of sales 366.1 201.9 - 568.0
Gross profit 468.1 202.1 - 670.2
Operating expenses 440.2 188.8 46.0 675.0
Operating income (loss) $ 27.9 $ 13.3 $ (46.0 ) $ (4.8 )
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Domestic International Unallocated /
Segment Segment Corporate Total
Statement of Operations Data:
Thirty-Nine Weeks Ended October 5,
2008
Revenues $ 2,665.8 $ 1,237.4 $ - $ 3,903.2
Cost of sales 1,236.3 626.7 - 1,863.0
Gross profit 1,429.5 610.7 - 2,040.2
Operating expenses 1,301.7 575.1 115.3 1,992.1
Operating income (loss) $ 127.8 $ 35.6 $ (115.3 ) $ 48.1
Thirty-Nine Weeks Ended
September 30, 2007 (as restated)
Revenues $ 2,610.7 $ 1,364.6 $ - $ 3,975.3
Cost of sales 1,190.3 717.5 - 1,907.8
Gross profit 1,420.4 647.1 - 2,067.5
Operating expenses 1,440.0 521.7 139.9 2,101.6
Operating income (loss) $ (19.6 ) $ 125.4 $ (139.9 ) $ (34.1 )
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Thirteen Weeks Ended October 5, 2008 Compared with Thirteen Weeks Ended
September 30, 2007
Domestic Segment. The following table is a summary of domestic results of
operations.
Thirteen Weeks Ended
October 5, 2008 September 30, 2007 Increase/(Decrease)
Percent of Percent of
Amount Revenue Amount Revenue Dollar Percent
(As restated)
Revenues:
Rental revenues:
Movies $ 515.6 63.5 % $ 563.0 67.5 % $ (47.4 ) -8.4 %
Games 50.5 6.2 % 51.1 6.1 % (0.6 ) -1.2 %
Previously rented product
("PRP") 113.9 14.0 % 120.1 14.4 % (6.2 ) -5.2 %
Total rental revenues 680.0 83.7 % 734.2 88.0 % (54.2 ) -7.4 %
Merchandise sales:
Movies 43.0 5.3 % 43.0 5.1 % - 0.0 %
Games 37.6 4.6 % 9.7 1.2 % 27.9 287.6 %
General merchandise 46.9 5.8 % 41.7 5.0 % 5.2 12.5 %
Total merchandise sales 127.5 15.7 % 94.4 11.3 % 33.1 35.1 %
Royalties and other 5.0 0.6 % 5.6 0.7 % (0.6 ) -10.7 %
Total revenues 812.5 100.0 % 834.2 100.0 % (21.7 ) -2.6 %
Cost of sales:
Cost of rental revenues 260.5 32.0 % 298.0 35.7 % (37.5 ) -12.6 %
Cost of merchandise sold 103.0 12.7 % 68.1 8.2 % 34.9 51.2 %
363.5 44.7 % 366.1 43.9 % (2.6 ) -0.7 %
Gross profit 449.0 55.3 % 468.1 56.1 % (19.1 ) -4.1 %
Operating expenses:
General and administrative:
Stores 331.5 40.8 % 330.9 39.7 % 0.6 0.2 %
Corporate and field 44.9 5.5 % 59.6 7.1 % (14.7 ) -24.7 %
Total general and administrative 376.4 46.3 % 390.5 46.8 % (14.1 ) -3.6 %
Advertising 23.7 3.0 % 19.5 2.4 % 4.2 21.5 %
Depreciation and intangible
amortization 26.4 3.2 % 30.2 3.6 % (3.8 ) -12.6 %
426.5 52.5 % 440.2 52.8 % (13.7 ) -3.1 %
Operating income (loss) $ 22.5 2.8 % $ 27.9 3.3 % $ (5.4 ) -19.4 %
Margins:
Rental margin 61.7 % 59.4 %
Merchandise margin 19.2 % 27.9 %
Gross margin 55.3 % 56.1 %
Thirteen Weeks Ended
October 5, 2008
Same-store revenues increase/(decrease)
Store only:
Rental revenues 0.8 %
Merchandise revenues 30.7 %
Total revenues 5.1 %
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Rental revenues
• Movie rental revenues decreased mainly as a result of:
• fewer by-mail subscribers, and
• a 3.0% reduction in company-operated stores during the last four quarters, offset by
• the favorable impact of price increases.
Merchandise sales
• Game same-store sales increased 277.1%, representing the favorable impact of:
• the expansion of games software, hardware and accessories to all stores,
• cross-merchandising games hardware, software and accessories to prominent positions in our stores, and
• an increase in units of games software sold for next generation game platforms that carry a higher average selling price than the older game platforms sold in the third quarter of 2007.
• Same-store general merchandise sales, which include sales of confections and other movie and game-related products, increased 9.1% due to:
• our strategy of having an assortment of licensed merchandise product available for major theatrical releases, and
• the roll-out of framed art product to our stores during the first quarter of 2008.
Gross profit
• Rental gross profit decreased due to:
• the decrease in rental revenues, offset by
• fewer free in-store exchanges for BLOCKBUSTER Total Access®("Total Access") subscribers, as well as
• favorable contractual settlements with vendors.
• Merchandise gross margin decreased from 27.9% to 19.2% due to a change in product mix. As a percentage of sales, there has been an increase in both games hardware and software sales, which generate a lower gross margin percentage than our other retail merchandise sales. In addition, DVD margin decreased due to more competitive consumer pricing. We may continue to experience lower merchandise gross margins as we continue to adjust our retail pricing models and invest in our retail growth.
Operating expenses
• Corporate and field general and administrative expense, which includes expenses incurred at the field and regional levels for store operations along with our by-mail offering, decreased due primarily to our cost-savings measures.
• Advertising expense, which includes by-mail subscriber acquisition costs, increased due to a focus on in-store marketing materials offset by a reduction in our advertising spend to promote Total Access.
• Depreciation and intangible amortization decreased primarily due to certain store assets becoming fully depreciated in addition to the decreased store count discussed above.
International Segment. The following table is a summary of international results of operations.
Thirteen Weeks Ended
October 5, 2008 September 30, 2007 Increase/(Decrease)
Percent of Percent of
Amount Revenue Amount Revenue Dollar Percent
(As restated)
Revenues:
Rental revenues:
Movies $ 171.2 43.6 % $ 183.7 45.5 % $ (12.5 ) -6.8 %
Games 14.1 3.6 % 14.3 3.5 % (0.2 ) -1.4 %
Previously rented product
("PRP") 34.6 8.8 % 30.5 7.5 % 4.1 13.4 %
Total rental revenues 219.9 56.0 % 228.5 56.5 % (8.6 ) -3.8 %
Merchandise sales:
Movies 41.8 10.7 % 48.5 12.0 % (6.7 ) -13.8 %
Games 85.1 21.7 % 81.9 20.3 % 3.2 3.9 %
General merchandise 43.5 11.1 % 42.8 10.6 % 0.7 1.6 %
Total merchandise sales 170.4 43.5 % 173.2 42.9 % (2.8 ) -1.6 %
Royalties and other 1.8 0.5 % 2.3 0.6 % (0.5 ) -21.7 %
Total revenues 392.1 100.0 % 404.0 100.0 % (11.9 ) -2.9 %
Cost of sales:
Cost of rental revenues 68.8 17.5 % 67.4 16.7 % 1.4 2.1 %
Cost of merchandise sold 129.0 32.9 % 134.5 33.3 % (5.5 ) -4.1 %
197.8 50.4 % 201.9 50.0 % (4.1 ) -2.0 %
Gross profit 194.3 49.6 % 202.1 50.0 % (7.8 ) -3.9 %
Operating expenses:
General and administrative 165.0 42.1 % 170.8 42.2 % (5.8 ) -3.4 %
Advertising 8.7 2.2 % 8.0 2.0 % 0.7 8.8 %
Depreciation and intangible
amortization 9.0 2.3 % 10.2 2.5 % (1.2 ) -11.8 %
Gain on sale of Gamestation - 0.0 % (0.2 ) 0.0 % 0.2 100.0 %
182.7 46.6 % 188.8 46.7 % (6.1 ) -3.2 %
. . .
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