Top rival Movie Gallery expects big loss

07:10 PM CST on Wednesday, February 8, 2006

By MARIA HALKIAS / The Dallas Morning News

It's not easy being No. 1 and No. 2 in the video-rental business, where Blockbuster Inc. and Movie Gallery Inc. are bracing for what's next.

FILE 2005/AP

Blockbuster's no late fees policy was estimated to cost it up to $450 million lost revenue in 2005.

Industry leader Blockbuster said Tuesday that it would cut 300 corporate-level jobs as it tries to trim $75 million in costs this year.

Top rival Movie Gallery, which last year acquired Hollywood Entertainment, said it's meeting with lenders and reaffirmed that it will report a significant fourth-quarter loss.

Meanwhile, their stock prices continue to hover around the cost of one movie rental. Dallas-based Blockbuster was unchanged Tuesday at $4.01 a share, and Alabama-based Movie Gallery fell 12 cents to $3.73.

Both are battling to stay competitive in a business that's rapidly changing due to technology advances.

Over the next two weeks, Blockbuster said it will lay off 200 corporate staffers throughout all departments and won't fill 100 jobs that sit vacant.

The reduction represents 23 percent of its 1,300 corporate-level staff in downtown Dallas and McKinney. It doesn't include 800 employees at its McKinney distribution center or store employees.

Last April, Blockbuster cut about 20 percent of its corporate staff, which then numbered 1,500. That offset spending to build up Blockbuster Online in its battle with Netflix Inc.

"If we make difficult decisions now, Blockbuster can outperform the industry this year," senior vice president Karen Raskopf said Tuesday. She said the company expects the video-rental industry will continue to be challenging in 2006, but both its online and in-store business "will fare better this year than last year."

Blockbuster will report earnings in late February or early March.

The fourth quarter is usually the strongest for Blockbuster, but the company has declined to offer any estimates. It's expected to earn 18 cents a share, according to a consensus of analysts surveyed by Thomson Financial. That compares with 7 cents in the 2004 quarter.

The current layoffs were expected and are part of a list of actions outlined last November by chief executive John Antioco.

Blockbuster renegotiated bank debt through 2007 and said it would close stores and consider selling smaller, noncore businesses such as Rhino Games and video game operations in the U.K.

Its Movie Trading Co. stores outside of Dallas-Fort Worth and a group of 70 independent video stores in upstate New York and Minnesota will be closed, sold or converted to the Blockbuster banner in the next few months, Ms. Raskopf said.

Wall Street analysts have said there are too many video stores, with online delivery and other technologies taking away customers.

Blockbuster and Movie Gallery, which operates mostly in smaller towns, each operate more than 4,000 U.S. stores. About 30 percent of Hollywood Video's stores overlap Blockbuster locations, according to Movie Gallery estimates.

Neither Blockbuster nor Movie Gallery wants to surrender a corner or neighborhood to the other just yet.

Blockbuster said it will close 100 to 150 stores this year, which is typical of past years, but it won't open many stores in 2006.

Movie Gallery slowed its expansion last year but said it expected to close only 75 to 100 stores in 2006.

Blockbuster's need to raise cash and cut costs is largely due to its "no late fees" policy.

Not only does it lose late-fee revenue, but its stores have to increase their new-release copy depth to meet customer demand.

Blockbuster estimated it lost about $450 million in late-fee revenue and $250 million to $300 million in operating income in 2005 because of the policy.

E-mail mhalkias@dallasnews.com