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The Empires Strike Back


"What if a country issued a stamp that was too scary to lick?"


Bungling would-be monopolist Blockbuster (BBI) is bucking a weak tape today after reporting $900k in profits on $1.72 billion in revenues (net margin: .05%) this morning. Among the fundamental news items in the report which could be considered the cause for a 5% rise in BBI's stock, the most likely candidates are:

* A reduction in cap-ex for '05 to $150 million vs. nearly 2x that in '04, with $70 million of the '05 spending dedicated to developing the on-line business.

* The announcement that Blockbuster is extending their odd-ball bid for Hollywood Entertainment (HLYW) through the 24th of March (Hollywood has already rejected the offer, suggesting that anti-trust concerns could make the deal impossible... "aren't .05% net margins per se evidence of monopoly power?").

* A greater than 20% increase in merchandise sales offsetting flat rental fees.

* Details on the financial hit expected from the fake move to No Late Fees (Buy the news).

Just for fun let's focus on that late fee thing. Again.

To quickly review: In December Blockbuster splashily announced the elimination of late fees. The alternative system is one in which the full retail price of a non-returned rental is charged to customers after 8 days. If a movie is returned after that point, the transaction works like a normal merchandise return except for the detail that a "restocking fee" (read: "late fee") is deducted from the amount returned to the customer.

I'm not the only one who noticed that these details didn't quite foot with the "No Late Fees" advertised. New Jersey is suing Blockbuster over the ads, claiming that they are misleading.

Blockbuster says they are working with New Jersey and are "open to any ideas" about how to make the ads more clear. Presumably the idea of actually eliminating the late fees to make the ads truthful was already considered and rejected.

BBI says that the elimination of late fees, such as it is, will result in the chain forgoing some $300million in operating profits for '05. The company adds that they are taking an $80million hit on fees in Q1 AND a $50 million charge for the launch of the "No Late Fees" program.

Imagine the write-off potential if Blockbuster can figure out a way to actually lose to New Jersey! EPS may very well never matter for this company again. The other cool part, and a likely explanation for the strength of Blockbuster's debt today despite no "stated" earnings as far as the eye can see: The "Charge full retail price after 7 days" plan obviously benefits the "retail revenue" metric that Blockbuster is pointing analysts towards as evidence of improving operations.

The plan makes sense, from a strictly amoral financial shuffle-puck perspective. Late fees, while a good business, were going to be eroding and the street gave BBI no real "credit" for them anyway. Erasing that line item and stuffing a portion of it into "merchandise revenue" makes management look like they can drive sales, doesn't have the bite that actually eliminating late fees would have and makes the company look proactive.

The problem is that me and New Jersey aren't the only ones who are going to notice the part where Blockbuster lies in a national ad campaign. So will customers, if they aren't too busy complaining about the "availability issues" that were utterly predictable but seem to have caught BBI off guard.

My concern from the long side of the stock wasn't over late fees. My concern was that management obviously didn't know much about that whole "retail" thing they were/ are diving into so earnestly. Suffice it to say that I didn't get closer to owning the stock today, regardless of the price action.

Royally Snarky Asides...

* I can thank the controversy over Prince Charles and Camilla for teaching me that The Church of England (established by Henry VIII to allow the looting of monks) forbids royalty from marrying Roman Catholics.

* As the parent of a Roman Catholic daughter, allow me to offer that the Church of England's rules weren't the only hurdle between my girl and the House of Windsor.... the mere idea of it has me donning the plaid and blue-face with a speed which would have stunned William Wallace.

* Speaking of the Ceremonial Donning of the Plaids, I'm doing the "Last Bullseye" for the second time in a month on Friday and this time they swear it's for real (Cramer's show is taking the time slot). It's not too early to start sending in topic ideas.

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No positions in stocks mentioned.

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