Don't Count Blockbuster Out Blockbuster Video (BBI), the place where everyone in America went at one time to rent movies, has gone from industry leader to the back of the bus. It's been a rough few years for Blockbuster and it was a long time coming. We've all been burned by Blockbuster's outrageous late fees. The scenario: rent a movie, forget to return it (even when they extended it to a five day rental) and bam! - outrageous late fee. This worked while they had an overwhelming retail presence, but the appearance of Netflix (NFLX) changed the movie rental market. Netflix's stock has gained over 400% in the past three years, along with a 2 for 1 split in February 2004. It was perfect timing - you could sign up for Netflix, select movies from their wonderful website, and best of all, never get stuck with a late fee. Blockbuster tried to jump on the bandwagon, put up a comparable website, invested millions on an advertising campaign… (remember the Super Bowl Ad?) The result? Failure. Hard times fell upon Blockbuster. It was (correctly) perceived that the business was beginning to fail, and the stock became junk, as illustrated by the stock price. The stock, which traded in the $20 - $30 range three years ago, has dropped to the $3 to $4 range for the past year. So why mention Blockbuster? For starters, revenue for the second quarter of 2006 was $1.32 billion. Granted, that is down from last year by 5%; but that is primarily due to stores closing, a changing business model, and the end of late fees. Blockbuster online business is now at 1.4 million subscribers (compared to Neflix's 4.3 million subs). During Netflix's last earnings call management admitted to losing 50,000 subs and acknowledged Blockbuster's more aggressive stance which resulted in increased spending on advertising during the quarter - validation that Blockbuster's strategy is working. Netflix also expects to have 5.5 to 5.7 million subscribers by next quarter, 20 million by 2010… is that reasonable with competition from not only Blockbuster, but other online retailers? Contrast this with the announcement from Blockbuster Chairman and Chief Executive John Antioch of the far more reasonable goal of achieving 2 million subscribers by year's end. Blockbuster is also busy cleaning up the balance sheet; they paid down approximately $150 million in debt including the entire $135 million balance outstanding under its revolving credit facility, cash increased by $205 million to $17.7 million from a $187.3 million deficit for the first six months of 2005. The books are beginning to show promise, unprofitable stores are closing, and the online business is just beginning to grow - online rentals accounted for only 6 percent of Blockbuster revenue in the second quarter, but they jumped 64 percent from a year ago, to nearly $58 million. Blockbuster now offers In-Store coupons to online users, increasing store traffic, something Netlifx can't offer. This allows Blockbuster to market video game rentals to these customers, something that Netflix cannot match. Blockbuster is one stop shopping, both online and at their stores. The stock is trading today under $4 and won't be there for long. Once the analysts get on board, (and they will), and upgrade the stock, expect to see BBI in the $5 to $6 range. It's convenience that wins, and the combination of an online and storefront presence will make a winner out of Blockbuster. Article written by: Ben Stevens Article posted on: August 20th, 2006