Blockbuster Says It Still Faces ‘Extremely Challenging Conditions’

Blockbuster continues to “face extremely challenging conditions” and may still be forced to file for Chapter 11 bankruptcy protection, it said in a 10-Q filing Friday with the SEC. The chain could also be forced into a Chapter 7 liquidation, it said.

The challenges Blockbuster faces include “increased industry competition and fragmentation as well as balancing the decline of a single channel with the ascension of emerging channels, such as vending and digital,” it said. Blockbuster said it’s sticking with the goal of “repositioning and transforming” the company “into a multi channel brand."

The company on Friday also reported results for Q2 ended July 4 that were weaker year-to-year. Its loss widened to $69 million, 32 cents per share, from $37 million, 21 cents, for reasons including the closure of some company-operated stores, a dip in comparable-store sales, and liquidity issues including costs associated with recapitalization efforts and lease terminations, it said. Revenue tumbled to $788 million from $982 million. Rental revenue fell to $606.3 million from $771.7 million. Revenue from product sales fell to $177.6 million from $204.9 million.

The decline in U.S. rental revenue included a $24.9 million drop in sales by mail, resulting from a 29.3 percent drop in the average number of subscribers by mail, a decline from the closure of 727 company-operated stores since Q2 last year, and a $39.4 million drop in revenue from previously rented product, “driven by lower per unit prices,” it said.

The drop in U.S. merchandise sales was caused mainly by a $6.3 million decrease in comparable-store game sales “as a result of a significant reduction in games merchandise inventory levels and reduced store traffic,” a $15.2 million “bulk sale of games” to an unspecified third-party game wholesaler in Q2 2009 versus an $11.5 million bulk sale of games to a third-party in Q2 this year, and store closures, Blockbuster said. Partly offsetting the declines were higher prices per unit, it said.

Blockbuster said it expects an increase in revenue from a daily charge it added March 1. The charge applies each day a member keeps a rental after the initial rental period. The charge continues as long as 10 days, at which point the rental is converted to an automatic sale, it said. The total of these charges and extended viewing fees soared to $58.2 million in Q2 from $14.9 million in Q2 last year.

The results were reported a day later than Blockbuster had planned. “Due to the review process and the way the timing came together,” the company said, it decided to release the Q2 earnings and file the 10-Q at the same time. “It’s not a sign of anything other than these factors,” it said.

One of the few bright spots was that Blockbuster said it reached a deal with some senior secured noteholders on a new agreement for forbearance while the company “continues to engage in productive discussions with certain of these noteholders and other strategic parties regarding various recapitalization opportunities.” The forbearance deal, “substantially similar” to a previous one, is effective until Sept. 30, unless ended earlier under its terms, Blockbuster said. The extension “provides Blockbuster with additional time and flexibility as it seeks to implement a more appropriate capital structure to support the company’s strategies for long-term growth and enhanced financial performance,” it said.

For the rest of 2010, Blockbuster remains “committed to our goal of preserving liquidity and optimizing our capital structure while continuing our transformation to a multi channel platform,” it said in the 10-Q. Softening the challenges that Blockbuster faces are “modification” of U.S. store movie rental terms and pricing, “implementation of additional studio windows, industry factors such as Hollywood/Movie Gallery store closures, better execution of our rental games offering, a balanced slate of movie releases, and merchandising improvements,” it said.

In the first two quarters of this year, Blockbuster said, it closed 507 company-owned U.S. stores, at a cost of more than $34 million. The company said it expects to have “at least” 7,500 Blockbuster Express kiosks in operation by year-end through an alliance with NCR. At Q2’s end, it had 5,300 kiosks, as well as 3,425 U.S. stores operating under the Blockbuster brand, 402 through franchisees. The company owned 2,383 stores under the Blockbuster and other brand names in 16 markets outside the U.S. Of those, 745 stores were operated through franchisees, it said.

Blockbuster said it recently expanded its Blockbuster On Demand service through Verizon Wireless’s Droid X mobile phone from Motorola, and through some Philips and Toshiba Blu-ray players.