Blockbuster hit on all fronts

Shares tumble 22% as company misses estimates

Redbox, Netflix and a weak economy have taken such a toll on Blockbuster that many investors on Thursday appeared to throw in the towel.

Not only did the company miss Wall Street's estimates, but it also reduced guidance for the full year, causing the stock to fall as much as 22% in after-hours trading.

The nation's top video-rental company reported a $39.7 million loss in the second quarter, an improvement over the $44.7 million in red ink a year ago.

Revenue, though, dipped 22% to $1 billion, about $100 million shy of predictions, with same-store sales falling 18%.

Rental revenue dropped 19% to $789.2 million and merchandise sales sank 31% to $224.9 million despite Blockbuster's efforts to sell more new and used DVDs and a larger variety of movie-based items at its stores.

Speaking to analysts, CEO Jim Keyes had some choice words for Redbox and others who rent movies for a buck out of kiosks, and he praised Warner Bros., Universal and Fox for taking a stand against such encroachments.

"One dollar per viewing is not a sustainable industry model," he said. But then he bragged that Blockbuster's own DVD kiosk business will add 9,500 units by next August.

Keyes, though, said his kiosks won't be focused on new titles but instead be used to wean itself from its dependence on selling previously viewed DVDs, a model he likened to "a drug" and "a necessary evil."

Keyes also boasted of Blockbuster's 50 million customers and predicted better things are in store for the second half of the year, but apparently not good enough to avoid having to rein in expectations.

Wall Street -- as is typical when companies lower guidance -- reacted swiftly and severely, knocking Blockbuster shares down to less than 70 cents.

"Although market dynamics remain challenging, we expect improvements during the second half of the year will be driven by a favorable title slate and increased unit availability," Keyes said.

Keyes also said the company is positioning itself as a leader in the digital distribution of movies by teaming with TiVo and Samsung.

Video games also present a huge opportunity, Keyes said, once Blockbuster works out a way to avoid about $45 in intellectual-property costs to stock each unit.

Blockbuster CFO Tom Casey said earnings before interest, taxes, depreciation and amortization will come in at no more than $290 million for the full year, down from the $325 million it had predicted.
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