Shares of Blockbuster Inc. tumbled Thursday as analysts said the company may need to undergo a significant restructuring this year as competition from Netflix Inc. and DVD vending machines erode revenue, making it difficult for the company to pay its debts.
The Dallas video rental chain said Wednesday it lost $435 million in the fourth quarter, while a key sales measure sank 16 percent — a dismal holiday season performance despite higher advertising and big library purchases, said BMO Capital Markets analyst Jeffrey Logsdon in a research note Thursday.
"Revenue erosion is now a defined trend," said Logsdon, even though Blockbuster has closed more than 1,300 underperforming stores. The company plans to close up to 545 more stores this year.
Janney analyst Tony Wible downgraded Blockbuster to "Sell" from "Neutral," saying a thin cash buffer of only $150 million, according to his estimates, combined with market share losses could impair the company's ability to service its debt next year. Debt obligations are about $200 million a year, he said.
The company said it is cutting costs by more than $200 million — less than Wible said he expected — and is seeking to sell international assets to improve liquidity.
But the company's turnaround plan may suffer if a cash crunch forces Blockbuster to sell assets on "less favorable" terms, Wible said. A big debt-for-equity swap could substantially dilute shareholders, he said.
Competition from online and mail DVD distributor Netflix and kiosk vendor Coinstar Inc.'s Redbox, along with "eroding" physical store revenue, a "dying" mail business, a "half-measured" entry into the kiosk trend and heavy debt load mean that if Blockbuster isn't able to sell its European assets, a "significant corporate restructuring would be necessary" this year, said Logsdon.
"While we believe the future is bright, the next 12 to 18 months will remain challenging," said CEO Jim Keyes in a statement Wednesday.
Shares tumbled 4.4 cents, or 12.1 percent, to 32 cents in premarket trading. The stock has ranged from 13 cents to $1.56 in the past 12 months.
Messages left for the company on Thursday were not immediately returned.
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