Blockbuster says may add stores

James Keyes, chairman and CEO of Blockbuster, speaks at the Reuters Media Summit in New York, November 27, 2007.

NEW YORK (Reuters) - Blockbuster Inc BBI.N Chief Executive Jim Keyes said on Tuesday he would consider expanding the video rental chain's base of 7,800 stores worldwide if his turnaround plan goes as expected over the next 12 months.

Outlining plans to return the ailing No. 1 U.S. movie rental chain to profitability, Keyes said he will reinstate an annual earnings forecast in the first quarter, simplify membership and pricing plans over the next 12 months and reconfigure stores. New stores should be smaller, added Keyes, a former 7-Eleven CEO who was brought on board in July to turn the company around.

"We must change our business model," Keyes told the Reuters Media Summit.

"We have a series of beta testing underway that will allow us to transform this business in whichever way the customer will allow us to take the brand."

Keyes admitted his efforts to communicate his vision for stemming losses backfired earlier this month with investors, who had wanted more specifics on when Blockbuster would become profitable.

"Some of the frustration the Street felt was our lack of guidance," he said on Tuesday.

Shares of Blockbuster have dropped about 26 percent since the investor meeting on November 8. The stock closed down 2 cents to $3.52 on the New York Stock Exchange on Tuesday.

Keyes said in addition to simpler pricing schemes and reformatting stores, he was encouraging store employees to play a bigger role in decision making.

"Our biggest challenge today is convincing our employees that they can take this business to another level. I do want to make the employees stakeholders," said Keyes. But he ruled out

offering incentives like stock ownership plans.

"Doing stock options ... is very difficult and expensive to do. By ownership, I mean it more in a cultural way," he said.

"We've never really pursued at Blockbuster (a strategy) to tailor the individual inventory of rental product to the unique needs of that neighborhood," he said.

One of Blockbuster's thorniest issues was late fees. Three years ago, the company cut the fees, which once accounted for about one-fifth of revenue, but angered customers. Renters then held on to movies longer, creating problems with inventory.

Keyes has steered clear of saying he would reintroduce late fees, but said he would simplify pricing in a way that would inspire customers to return DVDs.

This week, Blockbuster began testing kiosks that rent new movies for $1 a night at Papa Johns International Inc (PZZA.O) and Family Dollar Stores Inc (FDO.N) in Lexington, Kentucky.

Charging customers a daily fee for renting movies at Blockbuster locations was one way that Keyes is considering to simplify the store proposition, he said on Tuesday.

Blockbuster typically charges store customers upwards of $4 to rent films for lengths that can vary from 2 to 7 days.

"We think there is a huge opportunity to simplify," he said.

At the stores, Blockbuster will focus more on selling DVDs as well as renting them, installing new layouts that boast kids' areas, beverage bars and shelves filled with small electronic devices, soundtrack CDs and books to supplement its DVD offerings.

If these efforts pay off, Keyes said he would consider boosting the company's 7,800 stores.

"I'd say we need at least a good 12 months to get our existing physical plant rationalization. We think we could start growing," he said. "We want to grow the points of interruption and opportunities for people to get access, through some combination of stores, kiosks and electronic distribution," he said.