Blockbuster Inc Millie Sheppard ACG

Executive Summary Blockbuster suffered a great loss over the last year of It will be interesting to see how 2005 turns out for them and to see if they can turn their giant net loss into even the slightest net income. There is nothing that hurts a company’s numbers more than a net loss. Even a little net income looks better than any sort of net loss. ID=553&to=cp&Nav=0&LangID=1&s=0&ID=1442

Part A. Introduction Blockbusters Chief Executive Officer is John F. Antioco, who has held this position since Their home office is located at: 1201 Elm Street Dallas, Texas Blockbuster is known for their home video and game rentals. They also work hand-in-hand with studio production companies, helping to support the release of a new movie. Blockbuster also has “specialty games stores” operating under the name Rhino Video, that help bring in additional income in the retail of video games. While Blockbuster is located all through out the U.S., there are stores located in 24 other countries. California leads the way with 681 stores, followed close by Texas with 533, and Florida with 434.

Part A. Audit Report Blockbusters auditors are: PricewaterhouseCoopers LLP 2001 Ross Avenue Suite 1800 Dallas, TX According to PricewaterhouseCoopers the internal operations and management of Blockbuster is not up to par, and is one of the reasons for its lack of net income. Without the internal control and guidance, there is little communication involved, all of which are essential in a corporation as large as this one.

Part A. Stock Market Information Blockbuster sells two different stocks as of October 2004, referred to as class A and class B common Stocks. Class A stocks started being open to the public in 1999, and class B came around in October of 2004 as a part of Viacom.

Quarter Ended March 31, 2004 $ $15.60$0.02 Quarter Ended June 30, 2004 $17.58$14.61 $0.02 Quarter Ended September 30, 2004 $15.12$7.24 $0.02 Quarter Ended December 31, 2004 $10.49$6.50$9.85$6.31 $0.02 Here is a table comparing class A common stocks to class B stocks starting at the year end, and being computed quarterly. Year Ended December 31, 2004 Sales price (A): High Sales price (A): low Sale price (B): high Sale price (B): low Cash Dividend per share:

Buying/selling/holding stock Blockbuster stock as of December 2004 was at one of its lowest points. Its hard to say what it might do in the future, but when deciding whether to buy, sell or hold I think its easy to say that due to the net loss buying stock is not in everyones’ best interest. But as far as selling goes, the price of the stock is at its lowest.

Part B. Industry Situation and Company Plans Blockbuster is claiming that the majority of its problems are also lying in the fact that they recently got rid of late fees in many of their stores and are now competing with the idea of the online movie rental stores. Its only a matter of time before Blockbuster gets back on their feet after having made the necessary adjustments.

Part C. Income Statement Multi-step vs. Single step Blockbuster chose to use the multi-step income statement. This is apparent due to the fact that cost of goods sold is taken into account in order to calculate the gross profit for the company.

Even though the gross profit for the company increased over the year, it seems as though their expenses or liabilities increased as well, making their profit have to be applied there, instead of as an income. Gross Profit$3, 611.8$3, Operating Income (Loss)($ 1, 253.2)($ 836.7) Net Loss($ 1,248.8)($ 978.7) Year ended Dec. 31, 2004 (in millions)

Part C. Balance Sheet Current Assets Cash and cash equivalents Receivables Inventories Prepaid and other current assets Total Current Assets $ ,217.1 $ Rental Library Receivable from Viacom, net Property and equipment, net Deferred tax asset Intangibles, net Goodwill1,138.52,627.7 Other Assets TOTAL ASSETS$3,863.4$4,822.0 ASSETS (In millions) Year ended Dec. 31,

Current Liabilities Accounts payable Accrued expenses Current portion of long-term debt Current portion of capital lease obligations Deferred taxes Total Current Liabilities $ $1,449.4 $ $1,323.4 Long-term debt, less current portion1, Capital lease obligations, less current portion Deferred taxes Deferred rent liability Other liabilities TOTAL LIABILITIES$2,800.5$1,633.6 LIABILITIES year ended Dec. 31,

Preferred stock, par value $0.01 per share: shares authorized; no shares issued or outstanding Class A common stock, par value $0.01 per share; shares authorized; and 36.9 shares issued and outstanding for 2004 and 2003, respectively Class B common stock, par value $0.01 per share; shares authorized; 72.0 and shares issued and outstanding for 2004 and 2003, respectively.71.4 Additional paid-in capital5,336.76,227.3 Retained deficit(4,248.3)(2,999.5) Accumulated other comprehensive loss(27.3)(41.2) TOTAL STOCKHOLDER’S EQUITY1,062.93,188.4 Stockholder’s Equity (per share amounts) Year ended Dec. 31,

Assets = Liabilities + Stockholders Equity Total Assets$3,863.4$4,822.0 Total Liabilities$2,800.5$1,633.6 Total Stockholder’s Equity$1,062.9$3, : 3,863.4= 2, , : 4,822.0= 1, ,188.4 From 2003 to 2004 it is very evident that the liabilities took a significant increase, while the stockholders equity fell greatly, probably due to the slight decrease in assets.

Part C. Statement of Cash Flows (in millions) Since there was a net loss for the company in both 2004 and 2003, the net cash flow provided by operating activities was greater than the net loss both years. 2004: Net loss= $(1,248.8) Net cash flow for operations= 1,215.4 That shows a significant difference between the two. 2003: Net loss= $(978.7) Net cash flow for operations= 1,430.3 *Yet again it is evident that the net cash flow for 2003 was greater than the net loss. Being that the net loss in 2004 was much greater than in 2003, the net cash flow also decreased for 2004 as well.

Part C. Statement of Cash Flows continued The company as a whole increased their long-term investments from 2003 to 2004 by As far as their investing activities, those decreased in 2003 to 2004 from (1,024.6) to (1,112.3), respectively. The company’s primary source of financing was through long-term loans, which is one reason their liabilities jumped so high in The company has been bringing more money in for 2004, but it seems that their liabilities have increased to a point that has made them put their income right back into the company.

Part D. Accounting Policies The company’s main concern is its internal affairs. It has been mentioned that the company’s main problem lies within. For example how the managers and owners interact with the shift workers. They hope that over the next years they can work to reduce such problems, and improve their numbers by first fixing problems within.

Part E. Financial Analysis Liquidity Ratios Working Capital (in millions): current assets- current liabilities 2003: = $(331.7) 2004: = $(391.5) *since Blockbuster has more liabilities than assets, it becomes apparent that it will be really difficult to pay off their liabilities and could lead to business failure. Current Ratio: current assets/current liabilities 2003: 233.4/ 565.1= : 330.3/ =.458 *Its not effective to have a high or a low current ratio, this lets us know their ability to pay off loans, but seeing as the assets are more than liabilities, it will be significantly harder.

Part E. Financial Analysis Liquidity Ratios continued Receivable turnover net sales/average accounts receivable 2003: 5,911.7/ = times a year 2004: 6,053.2/ = times a year *A company prefers their receivable turnover to be a bit number because it lets us know how often you get cash for receivables. Average days’ sales uncollected 365/ receivable turnover 2003: 365/ = days 2004: 365/ = 10.9 days *This number is better if it is smaller, because it shows how long it takes for a customer to pay you off. And depending on the industry, this may or may not be a suitable number.

Part E. Financial Analysis Liquidity Ratios continued Inventory turnover cost of good sold/ average inventory 2003: 2,441.4/ = 5.24 times a year 2004: 2,389.8/ = 5.13 times a year *This calculations allows us to discover how frequently the shelves are restocked every year. Average days’ inventory on hand 365/ inventory turnover 2003: 365/ 5.24 = days 2004: 365/ 5.13 = days *Average days’ inventory on hand is another way of saying “shelf life.” How long a product sits on the shelf.

Part E. Financial Analysis Profitability Ratios Profit margin net income/ total revenue 2003: (978.7)/ 5,911.7 = (.17) 2004: (1,248.8)/ 6,053.2 = (.21) *How much of a sale equals net income. In blockbusters case, it is a negative number because they actually suffered a net loss instead of a net income. Asset turnover total revenue/ average total asset 2003: 5,911.7/ 4,344.7 = : 6,053.2/ 4,344.7 = 1.39 *How much are assets used to make sales happen. In this case the higher number shows that the company is more efficient.

Part E. Financial Analysis Profitability Ratios continued Return on assets net income/ average total assets 2003: (978.7)/ 4,344.7 = (23%) 2004: (1,248.8)/ 4,344.7 = (29%) *Return on assets shows us how much of every dollar goes to the pocket. Yet again, the calculation is negative due to the net loss seen by Blockbuster. Return on equity net income/ total stockholders equity 2003: (978.7)/ 3,188.4 = (31%) 2004: (1,248.8)/ 1,062.9 = (117%) *How much of every dollar is invested by stockholders. It’s the net loss that is really hurting Blockbuster.

Part E. Financial Analysis Solvency Ratio Debt to equity (in millions) total liabilities/ total stockholders equity 2003: 1,633.6/ 3,188.4 = 51% 2004: 2,800.5/ 1,062.9 = 263.5% *A ratio that is less than one shows that the company owes less to the creditors. By this calculation it is very apparent that the creditors own the company.

Part E. Financial Analysis Market Strength Ratios Price/earnings per share price per share/ earnings per share (earnings per share= net income/ #outstanding shares) Common Stock A 2003: (.00037) 2004: (.00026) Common Stock B 2003: (.0015) 2004: (.0012) *A small number at that, due mostly to the fact yet again that Blockbuster is suffering a significant net loss. Dividend yeild dividend per share/ stock price at year end 2003:.02/22.92= :.02/10.49=.00191