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TK's MORNING BUZZ: The Studios Don't Want to See Hollywood Entertainment Corp. Go Down the Tubes

30 Mar, 2001 By: Thomas K. Arnold

Looking at the chain's latest financials, studio executives and fellow retailers can't help but wonder if Hollywood Entertainment Corp. is going down the tubes.

Results for the fourth quarter ended Dec. 31, 2000, show a massive loss of $455 million, from less than $25 million in the fourth quarter of the previous year; a same-store sales slide of 1%; and the disturbing prognosis that "current trends in the company's business indicate a slowdown in comp store sales from previous expectations."

Hollywood blames its poor performance, in part, on "less than ideal levels of certain product in the stores caused by the company's current lack of access to capital."

In what is perhaps the most damning sign of all, Hollywood says it may not be able to make its deferred debt payment on May 5. I quote, verbatim, from Hollywood's official press release: "The company has presented its lenders with a business plan which provides for sufficient capital for competitive levels of product in its stores and timely payment for vendors while also giving the lenders meaningful debt reduction over the next 24 to 36 months.

"The company is targeting to have this accomplished by May 5, although we may not be successful because the final agreement requires an affirmative vote by 100% of the approximately 20 lenders in the credit facility. Failure to reach a satisfactory agreement with our lenders could have a negative effect onour business and operations."

Studio executives must be shaking over their lattes this morning, and waiting for the scheduled 8 a.m. conference call to see if chairman and president Mark Wattles can somehow explain just exactly what the hell is going on here.

The studios, you see, don't want to see Hollywood fall. The 1,818-store chain holds their best hopes of containing Blockbuster, which is already running out of control, gobbling up market share and making all sorts of demands on the studios. The studios, by caving in to Blockbuster's demands for cheaper product way back in the summer of 1997, may be responsible for fueling Blockbuster's terrific growth, but there's little doubt that they're not happy with that which they have wrought.

The studios would like nothing more than a handful of strong No. 2s to defend their territories and prevent Blockbuster from eating any more market share -- or at least, to make it a little more difficult, to slow down the Big Blue Juggernaut.

If Hollywood goes, the next line of defense is Movie Gallery, which has about 1,000 stores located mostly in smaller, out-of-the-way markets where Blockbuster hasn't yet stamped down as hard as it has in the bigger metropolitan areas. Movie Gallery is a great operation, but it has made a point of staying out of Blockbuster's way rather than confronting it, the way Hollywood has.

Yes, if Hollywood goes, studio executives are going to panic. Even though they brought this situation upon themselves, the last thing they want to do is face it alone.

Comments? Contact TK directly at:TKArnold@aol.com

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