I'm getting more and more interested in NFLX, here is a good article
A DVD Industry Insider Comments on the Video Rental Business and Netflix’ Advantage (BBI, MOVI, NFLX)
An email from a DVD industry insider (he asked to remain anonymous) argues that the traditional movie rental companies’ key problem is their SG&A (sales, general and administrative) expenses. His analysis also illustrates the gulf between Netflix’ fundamental cost structure and Blockbuster and Movie Gallery’s:
I’ve enjoyed your writing on the entertainment retail business and attached please find a data set I think you might interesting pertaining to the recent 50+% drops in share prices by MOVI and BBI.
The true challenge to video stores is their store operating expense. Not a decline in revenue. Their SG&A costs are nearly 2x’s other peer retailers - sometimes higher. You have to visit Tiffany’s to get store operating expense anywhere close to those of video stores and Blockbuster has neither Carrera marble nor chandeliers.
If Blockbuster could get their SG&A closer to 30%, even with a small contraction in the industry, their market cap should increase at least 8-fold. If they do not get their store operating expenses in line, they will go bankrupt. Blockbuster’s revenue is on par with Starbucks’ and nobody talks about Starbucks’ revenue problems.
Blockbuster has 6,000 sq. ft. stores when 85% of their revenue comes off the back wall. Plus they need 11 FTE’s to operate a store. Ben & Jerry’s ice cream shops are a nice little retail concept but if they needed 12 times the space and 3 times the staff to operate, they’d never open a store.
Here’s the SG&A analysis:
Ticker Company Revenue Gross Margin SG&A Market Cap EV to Rev
MOVI Movie Gallery $2,018,000,000 60% 59% $215,000,000 0.1x
BBI Blockbuster $6,053,200,000 60% 51% $848,470,000 0.1x
NFLX Netflix $506,228,000 45% 37% $1,410,000,000 2.8x
BBY Best Buy $27,433,000,000 24% 18% $21,000,000,000 0.8x
GME Gamestop $1,842,806,000 28% 20% $1,790,000,000 1.0x
WAG Walgreens $37,508,200,000 27% 22% $45,400,000 1.2x
BKS Barnes & Noble $4,873,595,000 31% 22% $2,410,000,000 0.5x
TGT Target $46,839,000,000 33% 22% $48,220,000,000 1.0x
WSM Williams Sonoma $3,136,931,000 41% 31% $4,350,000,000 1.4x
TWMC Trans World Entertainment $1,365,133,000 36% 33% $203,750,000 0.1x
TIF Tiffany & Company $2,204,831,000 56% 42% $5,460,000,000 2.5x
SBUX Starbucks $5,294,247,000 59% 43% $10,690,000,000 2.0x
You’ll note that GMs in the category are terrific, which probably explains the utter lack of discipline with store operating costs.
Quick comment: I’m not sure about this. Perhaps high gross margins and high SG&A are the natural cost structure of a business where the cost of goods is low (it’s mainly digital content, after all) and the heavy costs are in distribution. I’d be interested to hear other readers’ thoughts.
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