Will Movie Gallery closure boost Blockbuster?

BBI stock is up double-digits today on hopes of increased market share ... but that may not be enough to save the struggling chain

By InvestorPlace May 3, 2010 11:45AM

movie gallery closes blockbuster bbi stockThough Movie Gallery had already declared bankruptcy, things went from bad to worse over the weekend as the company has decided to close all of its 2,415 stores and liquidate its inventory. The movie rental chain had hoped to stay alive after some restructuring, but it couldn’t stop the bleeding fast enough.  Movie Gallery also operated locations under the Hollywood Video and Game Crazy brands, and all will be closed at an undetermined date.

 

This prevents an interesting dilemma for investors in regards to the top brick-and-mortar rental chain Blockbuster (BBI). Will the company continue its own descent to the bottom and follow Movie Gallery into oblivion, or will it turn Movie Gallery’s failure into a success now that it has the market almost all to itself?

 

Judging by share prices today, investors seem to thing Blockbuster will stick around. BBI stock is up 12% in intraday trading as of this writing.


Of course, the elephant in the room is mail-order rental provider Netflix (NFLX), which is up over 2% today on the news that it has squeezed yet another player out of the home DVD rental business. But the fact is that even though Movie Gallery wasn’t profitable, the chain managed to generate $750 million per year business on the old model of renting video games, DVDs and Blu-ray Discs out of retail locations. Netflix may gobble up some of that pie to meet the demand, but Blockbuster has a good shot at some of these customers.

Some may be renters who aren’t comfortable with Netflix, and others may be hardcore movie fans who don’t want to wait for some of the titles that are delayed in release by Netflix or in too high of a demand to be shipped promptly. Netflix and Redbox both have 28-day delay for new release title negotiated with studios, ostensibly to prompt DVD sales by die hard fans in that initial month-long window after release.


If you don’t want to wait that means you have two options – but the disc at full price, or rent it from your local Blockbuster.

Yes, Blockbuster is on the verge of bankruptcy. (Read about Blockbuster BBI stock and its challenges here.) In its 10k filed in March with the SEC, Blockbuster said that if it can't boost its operating income and if it is unable to restructure its debt, the company has "substantial doubt about our ability to continue as a going concern."


But Blockbuster is fighting for all its worth. BBI execs recently announced they inked two more deals with movie studios securing rights to rent movies from its stores and by mail the same day they are released for sale on DVD. The deals with Twentieth Century Fox Home Entertainment LLC and Sony Pictures Home Entertainment Inc. are important weapons in its fight to prove it can provide quicker release of quality films than its mail-order rival Netflix or rock-bottom vending machine prices of privately-held Redbox.


Investors are jumping into Blockbuster shares today on the hopes that the franchise can benefit from Movie Gallery’s failure. But the real question isn’t how much blockbuster will cash in on its new market share – it’s how fast BBI can actually turn a profit. It has posted three straight quarterly losses and is on track to post another when it posts earnings on May 13.


If Blockbuster doesn’t get in the black soon, it doesn’t matter how much of the market it controls. Without any profits, BBI will be forced into bankruptcy or liquidation just like Movie Gallery.


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