HLYW, continued...
Monday September 10, 4:20 pm Eastern Time
Blockbuster to Eject Some Tapes for DVDs
By Franklin Paul
NEW YORK (Reuters) - Video rental chain Blockbuster Inc. (NYSE:BBI - news) said on Monday it will get rid of about 25 percent of its tape library to make way for the fast-growing DVD format, but related charges of $450 million may have given some investors pause.
Shares of the industry leader closed down $1.64, or 8.2 percent, at $18.35 in late afternoon New York Stock Exchange trade. On Nasdaq, other home entertainment retailers slumped, including Hollywood Entertainment Corp. (NasdaqNM:HLYW - news), which fell $1.55, or 15.3 percent, to $8.60, and Movie Gallery Inc. (NasdaqNM:MOVI - news), down 89 cents, or 5.4 percent, at $15.61.
``The is a good news-bad news story,'' SG Cowen Securities analyst Edward Hatch said. In the long term, DVDs -- or digital video discs -- are more profitable to rent than the VHS videocassette format, he said, ``but I think (Blockbuster) will go through a transition period where inventory is being devalued.''
Blockbuster plans to expand its selection of DVDs, which offer higher quality pictures and sound than VHS. DVDs have gained in popularity as the price of their players has fallen, with many models available at less than $200.
SURGING DVD DEMAND
After only five years, more than 18 million DVD players have been sold in the U.S. and another 14 million are expected to be purchased this year, according to research firm NPD Group.
By comparison, there are more than 100 million VCRs that play VHS videocassettes in U.S. homes and offices. But DVD growth is dramatic: NPD Group analyst Tom Edwards said that while it took 25 years for VCRs to reach 90 percent penetration in the U.S., DVDs may hit that level in just 10 years.
Dallas-based Blockbuster, a unit of media conglomerate Viacom Inc. (NYSE:VIA - news), sees its gross margins rising by 2 percent or 3 percent in 2002 as a result of the move, since the smaller-sized discs will leave room for more product in stores. Also, DVDs on average are cheaper than tapes to acquire from the movie studios.
Blockbuster, with more than 7,800 stores around the world, will continue to carry many copies of new and popular films on videocassette as well as DVD. But some older library titles will fade away.
``The fourth quarter of last year, we knew for sure that the DVD format was going to take hold,'' Chairman and Chief Executive John Antioco told Reuters. ``And we thought that this was the time to spring into action, right before another huge surge in DVD penetration during this holiday season, and increase our market share lead as the top DVD renter.''
The titles that have been eliminated accounted for less than 1 percent of sales, he said.
CHARGES IN THIRD AND FOURTH QUARTERS
SG Cowen analyst Hatch said that in light of DVD's rapid growth, Blockbuster's plan is both inevitable and potentially profitable, although the company's books will reflect the near-term cost.
Blockbuster will cut the period over which it writes off, or amortizes, its videocassette library to nine months from 3 years. For accounting purposes, it said, it will cut residual prices of its remaining tapes to $2 and video games to $5. Prices for tapes on store shelves are expected to remain at about where they are now.
In all, the move will result in charges, primarily noncash, of $400 million for the third quarter and $50 million for the fourth quarter.
Hatch said that for a stock such as Blockbuster's, which has risen more than 120 percent this year, the charges may have startled some investors.
``Blockbuster stock year-to-date is way up,'' he said, ``and in a very tough market like this, the charge becomes a great reason for investors to take profits and step aside to re-evaluate the situation.''
But Fahnestock & Co. analyst Barry Sosnick said Blockbuster's cash outlay in the charge is minimal. The discs coming into the stores hold far more value than the outgoing tapes, he added.
``Face it, DVD is a hot area, and VHS is a dying area,'' he said. ``So, you are clearing out titles customers don't rent, and replacing them with titles people covet.'' |
