Blockbuster swings to profit in first quarter

NEW YORK (Reuters) - Blockbuster Inc (BBI.N), the largest U.S. movie rental chain, posted a higher-than-expected quarterly profit as it cut costs by closing stores, reducing advertising and overhead expenses.

Blockbuster's shares rose 33 cents, or nearly 11 percent, to $3.40 in premarket trading on Thursday.

Blockbuster, which has offered to buy Circuit City Stores CC.N for up to $1.3 billion, said sales at domestic stores open at least a year improved for the first time in five years due to a better line-up of new movies, improved in-store merchandising and more effective pricing.

Net profit was $45.4 million, or 20 cents per share, for its fiscal first quarter that ended April 6, compared with a year-earlier loss of $49 million or 27 cents per share.

Adjusted earnings from continuing operations were 21 cents in the quarter, beating the average Wall Street forecast of 16 cents, according to Reuters Estimates.

While quarterly revenue missed expectations, Blockbuster managed to cut selling, general and administrative expenses by $100.5 million on reduced advertising and lower overheads.

Blockbuster is repositioning itself to compete with new video distribution models provided by companies like Netflix Inc (NFLX.O) and Apple Inc (AAPL.O).

Chairman and Chief Executive Jim Keyes said in a statement that the company's Total Access program, which lets subscribers swap DVDs at Blockbuster stores for unlimited free rentals, was now profitable.

Domestic same-store sales rose 2.9 percent, driven by a 19.7 percent rise in merchandise sales and a 0.4 increase in rental revenue, the company said.

Overall quarterly revenue fell 5.4 percent to $1.39 billion as Blockbuster closed stores, compared to the average analyst forecast of $1.44 billion, according to Reuters Estimates.

Blockbuster said its gross margin rose 1.5 percentage points to 53.2 percent in the quarter.

After resisting requests for months, Circuit City last week finally said it would open its books to Blockbuster and its largest shareholder, billionaire investor Carl Icahn.

But Blockbuster's bid continues to draw skepticism from some analysts who question the strategic fit of the two struggling companies just as Blockbuster is staging a turnaround.

(Reporting by Michele Gershberg and Tiffany Wu in New York, and Sue Zeidler in Los Angeles; Editing by Maureen Bavdek)