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No bust for big kid on the block

The economy may be in a slump, but you wouldn't know it looking at the earnings report Fort Lauderdale-based Blockbuster Entertainment Corp. put out this week. In fact, if the economy gets worse, some analysts think Blockbuster might do even better. The video retailing chain reported Monday that profits rose 47 percent and revenues were up 76 percent for the third quarter ended Sept. 30. The $19.2-million in net income and $300.9-million in revenues set company records.

However, the stock market was not impressed. It has grown accustomed to record-setting results from Blockbuster.

Blockbuster stock, which peaked at $26 a share in mid-July, has been battered along with the rest of the market this summer. Recently, the company's stock, which is listed on the New York Stock Exchange, has been trading in the neighborhood of $18 to $20 a share. Monday when the stellar earnings report came out, Blockbuster shares actually fell 37{ cents. Tuesday's close was $18 a share, up 25 cents.

As far as Gary Wirt is concerned, the lower stock price just makes Blockbuster a better buy. He said Blockbuster's earnings were about what most analysts had projected, although some had expected bigger things.

"The rate of growth in the (video) industry may be slowing, but Blockbuster will continue to grow," said Wirt, an analyst for First Chicago Corp. in Chicago. "I think they've got a long way to go."

He's also among those who believe that hard times could benefit Blockbuster if people scale down their entertainment budgets and rent videos instead of going out to the movies. However, he said that kind of a trend hasn't shown up yet in Blockbuster's results.

Blockbuster is the kingpin of video retailing, with about an 11 percent share of the $10-billion industry. No competitor even comes close.

"Mom & Pop stores, which make up two-thirds of all specialty video outlets, dominate the industry, but cannot compete against the superstores of the world," Gary M. Jacobson, an analyst for Kidder, Peabody & Co. in New York, said in a report on Blockbuster earlier this year. "The days of these entrepreneurs are numbered as Blockbuster continues to gain market share."

He predicts Blockbuster, with its 6,000-square-foot stores, will have an 18 percent share of the national market within five years.

Wirt said the only real threat to Blockbuster's future would be the emergence of a popular alternative delivery system for home entertainment _ such as a cable pay-for-view system.

Absent that, the company's biggest challenge is managing its phenomenal growth, he said.

"They've got to make sure that their expansion is orderly and that they're handling it properly," Wirt said.

Blockbuster, which started in 1985 with a single store, now claims its 1,476 video stores have signed up 16-million members.

Revenues for all of 1989 were $663-million, while this year Blockbuster has recorded $815.1-million in just nine months. Analysts have been estimating revenues will top $1-billion and earnings for the year will come in somewhere between 80 cents and 95 cents per share. Profits for the first nine months of this year were $47.5-million, or 60 cents per share, compared to $44.2-million, or 57 cents a share, for all of last year.

The company stores, half of them owned by franchisees, are spread across 44 states, Guam, Puerto Rico, Canada and the United Kingdom. The company says it has signed letters of agreement with prospective franchisees in Mexico, Australia, Venezuela and Spain.

Earlier this month, Blockbuster announced it would open 15 stores in Japan in a joint venture with FUJITA & Co. Ltd., which is a partner in McDonald's restaurants and Toys-R-Us stores being opened in Japan.

Although Blockbuster has continued to produce stellar results, it has had its critics.

Blockbuster stock took a nose dive last year when an analyst for Bear, Stearns & Co. in New York attacked the company's accounting practices. Although Blockbuster officials defended their methods at the time, they since have changed some of them, switching to a shorter depreciation schedule for videotapes that makes analysts more comfortable.

Some criticism also has been directed at Blockbuster's policy of keeping a 50-50 ratio between company-owned and franchised stores. In many companies, franchised stores are more profitable. However, Blockbuster spokesman Wally Knief said his company makes more money on its own stores.

He said a franchisee pays Blockbuster a $68,000 fee, a monthly royalty of 4 to 8 percent of gross revenues, plus fees for some corporate-provided services. The franchisee also invests the $600,000 to $750,000 that it costs to build and open a new Blockbuster store.

In addition to building stores, Blockbuster has grown through acquisitions, which this year included Applause Video, a 40-store chain based in Omaha, Neb.

The company also is involved in a joint venture that is building two entertainment amphitheaters, one that will open soon in Phoenix, Ariz., and another on which construction is beginning in Charlotte, N.C. The company is evaluating other potential sites, spokesman Knief said.

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