Blockbuster scores with games, DVDs: Goal is to double video game revenue by 2003 - Brief Article

DSN Retailing Today, May 6, 2002 by Doug Desjardins

DALLAS -- Blockbuster Inc.'s recent decision to make DVD and video games its primary focus paid early dividends in what was expected to be a lackluster first quarter. The world's largest video rental chain reported a 115% increase in DVD rentals compared to the same period last year, and posted its first increase in same store video game sales since the fourth quarter of 1999.

"Our first quarter performance speaks to the strength of our business and validates the strategy we implemented last year focusing on the high-growth game and DVD formats," said ceo John Antioco. The chain reported $66 million in net income for the quarter.

In February, the chain began selling Playstation 2 consoles in 3,000 outlets as part of a new plan to carry a select line of consumer electronics products in stores. During an April 24 conference call, Antioco told analysts the chain will expand this effort when it begins carrying Microsoft's X-Box and Nintendo's GameCube later this year. Blockbuster did not release sales numbers for Playstation 2 or specify when X-Box and GameCube will arrive in stores.

The chain also plans to remerchandise its stores in the coming months to create separate game sections for X-Box, GameCube and Playstation 2. Blockbuster's goal is to double its video game revenue by fourth quarter 2003.

Looking forward, the chain expects game sales and rentals to grow throughout the year as the three popular game consoles increase market penetration. DVD rentals also are expected to continue their upward arc as hardware sales put DVD players in millions of new homes.

"Their DVD business will continue to grow stupendously, though you won't see them maintain 115% growth every quarter," said analyst Tom Adams of Adams Media Research. Blockbuster expects second quarter DVD and VHS rentals to improve with the arrival of several hit films on video in May and June, including "Harry Potter and Sorcerer's Stone," "Ocean's Eleven," "Black Hawk Down" and "Vanilla Sky."

Blockbuster also unveiled a new plan to enter small towns and rural areas through acquisitions. As part of this effort, the retailer purchased 68-store Mr. Movies, a chain with outlets in Minnesota and Iowa. Blockbuster said it would consider similar purchases during the year.

For its first quarter ended March 31, Blockbuster reported earnings of $66 million, or 37 cents per share, compared to $46.5 million, or 27 cents per share, the prior quarter. Same store sales increased a meager 0.2%, which was expected to be slow because of the Winter Olympics in February and a poor slate of new releases.

Due to a change in accounting practices, Blockbuster wrote down $1.8 billion in goodwill for the quarter, which resulted in a $1.75 billion loss. Despite the massive write down, the chain's stock price increased nearly 10% when it announced first quarter results on April 24, climbing $2.44 to $26.95.