Blockbuster Video (BBI):

Postmortem

Ellen Carr

The Art of Forecasting

April 2018
 BBI postmortem

● Scenario analysis: Not surprisingly, there were wide gaps among upside/base/downside forecasts for the
groups who did all three—but in some cases, too narrow a gap. Best practice submissions laid out a
clear list of assumptions for each, and then took a view on which forecast they found most plausible.
● Top-line forecasts:
– Few groups included a sharply negative same store sales projection, even in downside cases.
– Most groups had same store sales/top line pressure easing by 2008. Maybe—but justify this.

● Gross margin forecasts: 2008 revenue 2008 EBITDA

Actual 5,288 308
– Increasing merchandise sales relative to rentals (negative)
Average 5,501 152
– Online subscriber growth (presumably negative—NFLX’ gross 5,119 (404)
5,913 161
margin in 2005 was 32%, down from 34% in 2003)
5,607 311
– Shrinking top line (negative—deleveraging) 5,806 259
6,011 382
– Other brick & mortar retailers on DVD sale prices (negative) 5,133 (138)
5,304 351
– Red Box (negative) 5,926 283
5,028 184
– Reasonable upside case forecast (based on omnichannel
5,449 181
dominance and/or competitor closures/distress) 5,217 98
● SG&A forecasts:
– Start with dollars rather than % of sales; adjust for cost-cutting

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BBI postmortem

● New strategies (ye08):

– New store prototype (“full-service entertainment destinations”)—600 stores

– Increased range of in-store offerings (game ticketing, merchandise/hardware)—negative

margin impact

– “Choose your terms” policy on rentals

– Digital strategy (alliances with manufacturers, Movielink acquisition, Blockbuster OnDemand)

– International (35% revenues outside US 2008)

● 2009 guidance:
– $200mm incremental SG&A cuts

– 305-325mm EBITDA (vs 319mm 2008)—described as “conservative” by CFO

– Inventory reduction

– 30mm capex

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 BBI postmortem

Laundry list of liquidity options:

● reducing our capital expenditures by eliminating, delaying or curtailing discretionary and non-essential
spending;
● aggressively pursuing options for the divestiture of certain non-core assets, including selling and/or
licensing some of our international operations;
● managing our working capital through the optimization of inventory levels;
● reducing advertising expenses;
● continuing to renegotiate leases to generate significant reductions in future store occupancy costs;
● reducing expenditures on consultants and professional service providers;
● restructuring and reengineering our organization and processes to reduce our operating costs and
increase efficiency;
● working to further reduce our obligations in connection with the provision of letters of credit;
● exploring our options with respect to borrowing against unpledged assets in certain international
markets;
● exploring the availability of issuing additional equity securities; and
● considering making future payments of preferred stock dividends in-kind as opposed to in cash.

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 BBI postmortem

Revolver amendments (2008)

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BBI postmortem

The credit crisis didn’t help . . .

On August 14, 2008, Moody’s Investors Service downgraded our

probability of default rating to Caa1 from B3 based on perceived
refinancing challenges given current and anticipated market
conditions and the general unavailability of capital on favorable
terms. However, Moody’s Investors Service upgraded the rating
on our credit facility to B1 from B3 on the same date as a result of
our operating improvements.

▪ Would BBI have survived another couple of years without the

credit crisis?

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 BBI postmortem

2009 didn’t pan out as guided:

● Substantial top line pressure
● “Emergency” bond issue: 11.75% senior secured 5-year bond with steep amortization schedule at $94
issued 9/09
– Icahn / affiliates ultimately bought 80% of this bond issue at deep discounts
● Bankruptcy filing 9/10
● Dish buys BBI for $234mm in 2011 and shutters its last stores in 2013

2003 2004 2005 2006 2007 2008 2009 actual 2009 guidance
Net sales 5,912 6,053 5,864 5,522 5,542 5,288 4,062
Gross margin 59.6% 59.7% 54.9% 55.1% 51.7% 51.5% 53.6%
EBITDA 728 518 161 315 160 308 165 315
% of sales 12.3% 8.6% 2.7% 5.7% 2.9% 5.8% 4.1%
Less: Cash interest 33 38 99 102 89 73 112 75
Cash dividends 14 11 11 11 3
Cash taxes 181 62 29 (66) 33 20 (8) 25
Capex 177 275 139 79 74 118 32 30
Increase (decrease) in WC 45 (49) 161 (12) 131 253 47
Net rental payments (118) 50 (16) (35) (31) (71) (20)
Other (3) (5) (41) (15) (5) (18) 8
Free Cash Flow 395 147 (210) 251 (142) (78) (9) 185
Total comps -2.2% -3.2% -4.9% -4.2% -2.3% 3.9% -13.1%
Total sales growth 6.2% 2.4% -3.1% -5.8% 0.4% -4.6% -23.2%
Total stores 8,687 9,094 9,042 8,360 7,830 7,405 6,520

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BBI postmortem

● Spinoff from Viacom with substantial debt

● No Late Fees abrupt elimination
● Challenge of activist investor
● “Essential abandonment” of online strategy under new CEO (2007)
● Credit crisis

Antioco: Icahn:
I firmly believe that if BBI failed because of
our online strategy had too much debt and
not been essentially changes in the
abandoned, industry.
Blockbuster Online
would have 10 million
subscribers today, and
we’d be rivaling Netflix
for the leadership
position in the internet
downloading business.