Blockbuster reports wider loss

LOS ANGELES (Reuters) - Blockbuster Inc. (BBI.N), the No. 1 U.S. video rental chain, reported a surprisingly big quarterly loss on Wednesday on costs for its new online rental program and flat in-store sales, sending its shares down more than 12 percent.

The company also said it will sell its U.K.-based Game Station chain to Game Group Plc (GMG.L) for $150 million, with most of the proceeds going to pay down debt. The move is part of the company's plan to sell off secondary assets.

Blockbuster posted a first-quarter net loss of $46.4 million, or 26 cents per share, compared with a loss of $1.9 million, or 3 cents per share, a year earlier.

Revenue rose 5.4 percent to $1.47 billion, with $20 million coming from the termination of Blockbuster's Brazilian franchise agreement.

Analysts, on average, had forecast a loss of 15 cents a share on revenue of $1.37 billion, according to Reuters Estimates.

Blockbuster, while trying to pay down debt, has been spending aggressively to support its Total Access marketing plan that gives online customers more rentals and the option to swap DVDs at Blockbuster stores.

The company had more than 3 million paying subscribers for the business at the end of the first quarter.

The program, launched late last year, has reinvigorated Blockbuster online against rival Netflix Inc. (NFLX.O), according to company officials.

But JP Morgan analyst Barton Crockett, who has a neutral rating on Blockbuster, said the program reduced earnings more than Wall Street had expected.

"That's a lot of money to lose on a video rental service and it only makes sense if they can turn the corner and start making money next year," Crockett said. "They are not providing us with enough information to make sure that they can turn the corner and start making money next year."

Wedbush Morgan analyst Michael Pachter, who recommends buying Blockbuster stock, said he was not concerned with the greater-than-expected quarterly loss, as long as the company turned a profit by year's end.

"If they can be profitable in Q4, people are going to realize they are financing their growth and are doing it profitably," he said.

Blockbuster Chairman and Chief Executive John Antioco told Reuters the company planned to focus throughout 2007 on refining the Total Access model and selling more merchandise to online subscribers.

"The online rental market is projected to grow at 40 percent plus this year," Antioco said in an interview. "It's a land grab and we need to take advantage of it."

Antioco said analysts' expectations that Blockbuster would turn a profit by year's end were "reasonable."

"I understand it and ... clearly we wouldn't be growing this business if we didn't think we could make a profit on it," Antioco said.

The company invested $70 million in the first quarter to support the program and plans to spend another $100 million the rest of this year to double Blockbuster Online's subscriber base to more than 4 million subscribers, Antioco said.

He said Netflix's prediction that Blockbuster would be forced by its losses to change the pricing of Total Access was wrong, but added that an "a la carte" pricing structure allowing customers to choose online-only pricing was possible.

The company also announced that it had paid down about $500 million of its former $1 billion total debt and was seeking a new credit facility.

"We're looking for a well-earned reduction in rate and significant changes in the overall make-up of the credit agreement that reflects the rating we have today," Chief Financial Officer Larry Zine said.

Blockbuster shares fell as low as $5.34, before trading down 71 cents, or 11.4 percent, at $5.50 on the New York Stock Exchange early Wednesday afternoon.

(Additional reporting by Brad Dorfman in Chicago)