It is often said that turnarounds rarely turn around and earlier today it looked like Blockbuster (BBI) was going to be no exception. The stock, which had already been battered over the course of the last year, declined sharply today to 22 cents before trading was halted on news that the company had hired restructuring specialists Kirkland & Ellis to explore bankruptcy. According to this Forbes article titled Blockbuster Not Bust , the reports of Blockbuster's demise were a little premature and the company refuted claimed about filing for Chapter 11 bankruptcy. With over $854 million in debt on its balance sheet and only $35 million remaining on a $400 million line of credit, the company was hoping that Kirkland & Ellis would help it refinance some of its loans. The stock rebounded nearly 60% or 13 cents to 35 cents in after hour trading.

The picture for Blockbuster has been bleak for some time now but for a few brief moments it looked like new management at the company might be able to turn the company around. The company posted a 11% improvement in same store sales numbers, cut back on aggressive marketing for its online subscription service, acquired the movie download service Movielink for a fraction of the money spent by the large studios developing it, closed down unprofitable stores, inked a deal with Live Nation to sell concert tickets and even managed to post a profit earlier this fiscal year after several years of red ink.

However with their credit facility coming due in August 2009, the prospects for Blockbuster look grim right now. When I invested in Blockbuster back in mid 2007, I was aware of the fact that the company represented a risky turnaround situation and stated,

"Did I mention that turnaround situations are risky (just ask investors of Gateway (GTW) or Imax (IMAX) who are still waiting for a turnaround) and the company may just as easily go bankrupt. Blockbuster may be best suited for investors who have a healthy appetite for contrarian bets and/or have a diversified portfolio that is anchored by core holdings like Johnson & Johnson (JNJ) and Procter & Gamble (PG)."

It appears that my appetite for Blockbuster and my faith in new management were probably misplaced and I am now looking at a position that has lost most of its value even if it rebounds by a few cents tomorrow. In the third quarter conference call, Blockbuster's CEO Jim Keyes said,

"While the doubling in our trailing 12 month adjusted EBITDA over the last year puts us in a much, much stronger financial position, we still have nine months to pursue new financing options but we have to have a back up capital plan that if needed would allow us to self fund this business without the use of any additional outside capital."

Closing the position right now would generate very little capital and I am inclined to retain the stock at least until the fourth quarter results are announced on March 19, 2009. The fourth quarter is traditionally their strongest quarter and there is a possibility that they might still raise the capital they require to continue implementing a strategy that has seen revenue per visit increase 15.4%, net paid rental rate increase 17%, net total revenue per square foot increase 7.6%, gross profit per square foot increase 2.4% and total store revenues improve 16%  year-to-date.

Voluntary Disclosure: I am long Blockbuster in my personal portfolio.