Shares of Blockbuster (NYSE: BBI) took a nosedive yesterday dropping more than .11 (approximately 29%) on rumors of bankruptcy being in the near future for the video rental giant. From a business perspective, Blockbuster is doing all that it can to regroup, but in the midst of soft sales and an ever-changing industry with extremely tough competition, it is struggling to keep, much less gain, market share.
Blockbuster filed a 10-K on Tuesday stating that it may be forced into bankruptcy if its restructuring efforts cannot meet the liquidity needs for the company. In an industry where customers have been abandoning the idea of going to a video store to rent a movie for some time now, Blockbuster simply has not been able to overcome the financial troubles caused by this fact.
Competition from companies such as Netflix (NASDAQ Global Select: NFLX) has stiffened as consumers prefer staying in the comfort of their homes to order videos and the low-cost subscription services that are offered. Couple this competition with the increased availability of online movies or pay per view movies through both satellite and cable providers and the effects of staying stagnant in this “new market” has become evident on the financial condition of Blockbuster. Despite a few different marketing programs, BBI has not come up with a solution to these issues and it is pushing the once Goliath on the verge of destruction.
Blockbuster’s debt, according to a recent filing, totals almost $1 BILLION including lease agreements. They were in a similar situation last year, but managed to survive the storm by slashing debt through store closings. More store closings are apparently in the company’s future along with the plan for a debt-for-equity swap which is becoming the common solution for so many troubled large companies. Yellow Roadways (NYSE: YRCW) is a company in the middle of that situation and the shareholder confidence there is at an all-time low as reflected in the share price. The recent filing by Blockbuster, states that the company has a “substantial doubt about our ability to continue as a going concern,”, and the shareholders apparently agree.
There is still a glimmer of hope for Blockbuster, and its name is Sirius/XM. Several months ago, bankruptcy rumors were running amuck for SIRI and the stock price plummeted to a dime. Traders leaped at the opportunity to grab it at that level and the rumors slowly dissipated. SIRI is now trading around .90. Could a similar situation happen for BBI? Anything is possible to a certain degree. At this moment, BBI is still holding the .27 area. With caution, if some buying pressure starts coming in, there will be a very viable opportunity to day trade BBI for gains. Time will tell.