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Blockbuster Management Gets the Proxy-Fight Beatdown They Deserve


"She was looking kinda dumb with a finger and her thumb in the shape of an 'L' on her forehead..."


Blockbuster (BBI) CEO John Antioco didn't take my advice.

He didn't make a run at NetFlix (NFLX). He didn't take any one of dozens of opportunities to remake the mold for corporate communications in a manner of refreshing candor. He didn't clarify a plan for saving the eroding store operations in a convincing way.

Mr. Antioco and his team seemed to be under the impression that Icahn's proxy fight was a contest akin to a Student Council election. Blockbuster called it's suggested ballot of directors "The White Ticket" (get it? they're the good guys!), they fretted that Icahn didn't understand the nature of their business. They complained that Icahn was over stating the bonus paid to Mr. Antioco. Mostly, the expressed optimism that Blockbuster was "on the right track" with a clear plan.

Then Blockbuster released numbers which suggested that the company doesn't even know where the right track is. Even worse, judging by the report, even if they did know what progress looked like they'd almost certainly try to hide it from investors.

"Earnings Quality"

Blockbusters quarterly release does a nice job of illustrating why I keep boo-hooing about an improvement in the quality of American corporations earnings reports being a myth.

According to Bloomberg, the average analyst estimate for BBI's 1q was a loss of .28. On a GAAP-basis, the company actually lost .31. Now, in the Toon Town world of "accountability" we're all supposed to live in, missing by 3-cents would have been an ugly truth, worth much investigation and consideration. Where was the business flagging? Were these issues management could be expected to control? What would Icahn do, as an alternative?

Because Student Council elections aren't so much about "the nitty gritty", and because Blockbuster management was very much pursuing a Smiley Face positioning strategy, the company decided that they had, in fact, beat the analyst's estimate by a full nickel!

Since they have to actually report the real numbers, by law, they dismissed them with the first sentence of paragraph 2 of the release. "$57.5million, or .31 per share, compared with net income of $114.4 million, or .63 per share last year." With that unpleasantness out of the way, they leapt immediately to, "Adjusted net loss for the first quarter of 2005 totaled $42.7 million, or $.23 per share, excluding non-cash share-based compensation expense and one-time costs incurred in the offort to acquire Hollywood Entertainment (HLWD)."

We, those who review financial statements, are being fire-hosed with numerical sewage. The above is as clear as the release from Blockbuster gets. Where is the revenue being booked on the 8th day, in lueu of "late fees", going? That would seem apt to inflate DVD revenues if not set clearly aside and itemized. Doing that could make the Antioco plan seem to be more "on the correct tracks" than it seemed, couldn't it?

Of course it could. Alas, it's hard to say for sure without dedicating even more time to a company that is clearly not a short (Icahn will jam it somehow) and way too screwed up to be a long. I have no real specific answers on the actual performance of Blockbusters' stores and various initiatives (beware companies using this term liberally... they are places where nothing is ever finished... like the US "metric conversion initiative"). Near as I can tell, the company isn't offering that kind of detail.

I do however know two things:

1. No, Sarbanes- Oxley has not cleaned up earnings. It's actually more difficult to analyze a company now than it was before the acts. We didn't believe the numbers then, either. We just didn't have to pretend that we did.

2. Blockbuster deserved to lose the election to Icahn, if only for the way they leered over supporting the "White Ticket".

And a bonus Third thing I know: I'm not liking NFLX less after the BBI vote! Netflix (NFLX) is up a buck or so on the news. The move is being called aggressive. For the day, maybe. In the big picture, I'm considering it "a nice start". For whatever that may be worth.

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