Video Rentals Thriving

As noted last week, since September 11 video rentals have mushroomed, as consumers have opted for the security of their homes instead of heading for the theater. The effects of this recent trend are being felt directly by video rental company Blockbuster which recently announced financial results for its third quarter ended September 30, 2001.

The company is reporting that total revenues for the third quarter amounted to $1.26 billion, a 5.9% increase over the third quarter of 2000, due to steady growth in rental revenues. Rental revenues improved by 6.3% to $1.08 billion, primarily due to a 4.7% increase in worldwide same store rental revenues and the net addition of 176 new company-operated stores since the third quarter of last year.

Blockbuster's John Antioco explains, "During the third quarter, Blockbuster continued to generate solid operating results, and we took decisive steps, including the acceleration of our DVD initiative, to position the company to capitalize on new growth opportunities."

Earlier in the quarter, Blockbuster announced that it would eliminate approximately 25% of its VHS library and selected games as part of a re-merchandising of its stores to make room for high growth, high margin products like DVD. Additionally, the company says the estimated residual value of VHS rental inventories was reduced from $4 per unit to $2 per unit, and the estimated useful shelf life of catalog product was reduced from 36 months to 9 months.

Antioco says, "By re-merchandising our stores to make room for an expanded selection of DVDs, we are positioning Blockbuster to hasten the growth opportunities presented by this higher margin, digital format." He adds that the company expects to build approximately 200–250 new stores by the end of the year, the majority of which will be domestic.

According to Blockbuster, the transition from VHS to DVD is expected to increase worldwide same-store revenues for the fourth quarter in the low-single-digit range, with the increase in gross profit expected to be in the mid-single-digit range. "This increase in gross profit will be achieved through a combination of sales growth and margin improvement, driven primarily by growth in higher margin DVD rentals."