A video game drain for B'buster

Rentals squeeze company's 3rd qtr.

By PAUL SWEETING

Antioco

Slower than expected summer rentals -- and greater than expected expenditure on vidgame inventory --caused Blockbuster Video to miss its third-quarter earnings target.

The Dallas-based company -- a subsid of media giant Viacom -- Tuesday posted $51 million in net income, compared to a $224.9 million loss in the same period last year. But the profit fell just below analyst's projections for the latest period.

Blockbuster CEO John Antioco said the company expects to meet earlier expectations for the full year by exceeding expectations for the fourth quarter. Execs forecast a percentage rise in gross profit in the mid- to high single-digits for the fourth quarter, up from an earlier projection in the mid-single digits.

But investors still appeared disappointed with the results for the latest quarter. Shares of Blockbuster fell $1.21, or 5%, to $24.42 after the earnings were announced.

Revenue rose 10% to $1.39 billion in the quarter. Worldwide same-store sales grew 7% in the quarter, including an almost 8% surge in domestic comps.

While Blockbuster's rental revenue grew less than 4% to $1.12 billion, merchandise sales surged 56% to $238 million.

Although the company did not provide a precise breakout of its merchandise sales, which includes candy and other non-movie items, Antioco said new DVD sales were up 100% for the quarter, while overall movie sales including VHS jumped 80%.

Blockbuster's gross margins on new product sales are far lower than its rental margins, but in a conference call with press and analysts Antioco downplayed the impact of increased sales on the retailer's overall margins. He said the decline in revenue from late fees -- resulting from the chain's switch from a five- to a seven-day rental period -- also had little overall impact on results as it boosted customer satisfaction and ultimately drove more rentals.

Results were impacted, however, by the unexpected popularity of Blockbuster's Game Freedom Pass program, which allows customers to keep out up to two games for a month without facing extended viewing fees.

"If I had it to do over again, I think I would do some things differently," Antioco said. "It put a lot of pressure on our inventory, causing us to spend an additional $14 million on game inventory that we hadn't planned on."

Paul Sweeting is a reporter for Daily Variety sister publication Video Business.