Blockbuster Inc. warned that it may have to file for bankruptcy protection in the face of declining sales and rising competition, sending its shares plummeting 30 per cent on Wednesday.
The one-time king of movie rentals is a victim of new technology and its own sluggish strategy to counter the onslaught of new forms of competition in recent years, leaving investors to wonder now whether there is enough time to turn the company around.
Weakening financials and growing competition "raise substantial doubt about our ability to continue as a going concern," Blockbuster said in a filing with U.S. regulators late Tuesday.
The company said it may try to strengthen its balance sheet by converting senior debt into common stock, thereby diluting current shareholders' holdings. It also raised the possibility of using its Canadian assets as collateral on payments to the movie studios.
"Although we face challenging conditions, we continue to work hard to reposition and transform Blockbuster into a multi-channel brand that offers customers the most convenient access to media entertainment," the company said in a prepared statement Wednesday.
Blockbuster has a market value today of just $78-million (U.S.). The shares fell 11 cents to 29 cents on the New York Stock Exchange. Five years ago they traded around $10.
The Dallas-based company has been losing business to a number of challengers, including Netflix Inc., which sells movie rental subscriptions by mail and online, and Coinstar Inc.'s Redbox, which rents films for $1 a night from vending machines located in grocery stores. In addition, cable and satellite TV companies are offering on-demand movie services and Apple Inc. is selling movies and TV programs online.
Blockbuster has tried to mimic these business models without significant success.
"We got a dead-man-walking situation here," Needham & Co. analyst Charles Wolf told Barron's magazine last month, saying Blockbuster had only a few months left to make its stores profitable.
In one indication of how marginalized Blockbuster has become, shares of Netflix inched up less than 1 per cent Wednesday on the news of a possible bankruptcy filing by its rival.
California-based Netflix has been growing by nearly 20 per cent annually over the last few years and posted profit of $679.7-million last year on sales of $1.67-billion. In contrast, Blockbuster sales fell 20 per cent last year to $4.1-billion. Losses increased to $558.2-million, up from $374.1-million. The company closed hundreds of its 6,500 stores last year as it moved to boost its online and kiosk-based sales. But at the end of 2009, Blockbusters' liabilities exceeded assets by $314-million.
Numerous U.S. media reports over the last year have said the company was in talks with lawyers and investment bankers about ways to manage nearly $1-billion in debt. One such report a year ago sent the shares tumbling more than 85 per cent.
Last October the company managed to rearrange some of its financing with a $675-million bond deal that offered a yield of 11.75 per cent.