The Grim Pragmatism Contained Within Blockbuster's Latest Annual Report

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The NYSE is threatening to delist Blockbuster's stock come May 26's shareholders' meeting in Dallas.
Stayed up way too late last night reading all 148 pages of Blockbuster's latest annual report, which was submitted yesterday to the Securities and Exchange Commission and is full of dire warnings that, look, bankruptcy may be inevitable no matter what CEO Jim Keyes says. It's a pretty gritty read -- perhaps the most honest accounting yet of what's really going on at 1201 Elm Street as Keyes and the board try to keep the company afloat and 48,000 people employed despite quarter after quarter of plunging revenues, shuttered stores and stock prices inching toward oblivion.

Matter of fact, that's one significant item of interest contained within the report: On Page 33, Blockbuster warns that "we may not be able to remain in compliance with the New York Stock Exchange's continued listing criteria." The reason: The stock has been trading well below the one-dollar mark for months, and in November, says the report, the NYSE sent Blockbuster a warning that its Class A common stock didn't satisfy its listing standard. And if it doesn't get the price up by the time of the shareholders' meeting in Dallas on May 26, that could be that: "If we fail to cure this deficiency, the Exchange could begin the delisting process."

But the report provides little evidence that a turnaround is in sight.

Movie rental inventory shrunk 17 percent in 2009 ("to preserve liquidity during our refinancing"); advertising, likewise "limited by the ongoing focus on our cash conservation strategy," has been limited to in-store marketing for tent-pole releases; and more cuts are on the way. The company plans to eliminate 500 to 545 more stores in 2010 (273 were shuttered in the first two month of 2010 alone), and, says the report, "We are currently reviewing many of our store leases and evaluating certain sites to close or downsize based on store profitability."

Yet even if Blockbuster can get the stores under control and rebrand itself as a digital delivery service or kiosk-content provider, it may be too late: "In these areas we face substantial competition from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software, and digital suppliers." And NCR, which hopes to have 10,000 Blockbuster Express kiosks up and running by the middle of the year, isn't obligated to do so: It "may elect to discontinue doing so at any time." (Update: NCR clarifies: "The goal has always been 10,000 by the end of the year," not the middle, as the report says.)

The document offers myriad reasons for the downturn in business -- everything from Amazon to Walmart to Netflix to Redbox to piracy to the unpredictability of weather to the fact people just like to buy movies these days because, well, DVDs are just so damned cheap now. "We believe that the increased consumer purchases of movies have been due in part to consumer interest in building DVD libraries of classic movies and personal favorites," says the report.

There are but four paragraphs, on Pages 43 and 44, that attempt to put a brave face on the future. And, even then, the optimism is tempered with the stark reality that all is most definitely not well:
"In 2010, our goal is to preserve liquidity and optimize our capital structure while we continue the transformation to a multi-channel platform. Over the next 12 to 18 months, we expect to continue facing the challenges of the macroeconomic environment, increased industry competition and fragmentation, and balancing the decline of a single channel with the ascension of emerging channels, such as vending and digital. As we look at our plans for 2010, stores remain a key component of our multi-channel offering. Our current 2010 plan contemplates a domestic same-store sales decline in the range of mid-single digits to high single digits. Factors contemplated in our current 2010 plan that we expect to mitigate these challenges are modification of our domestic stores movie rental terms and pricing, implementation of 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 including Blockbuster Premieres. However, there can be no assurance regarding these matters given the current state of the global economy and aggressive new competition, both of which have negatively impacted our ability to accurately forecast our results of operations and cash position, and which may result in deterioration of our revenues beyond what we anticipate. Further deterioration would negatively impact our anticipated revenues, profitability and cash flows from operations. The expectation to achieve planned financial results is subject to a number of assumptions, many of which are outside our control, such as the state of the global economy, competitive pressures, and no significant contraction in our trade terms."
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