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All Smiles At Movie Gallery

4 Jun, 2002 By: Joan Villa

Number-three rental chain Movie Gallery boosted earnings targets by about 15 cents per share to a range of $1.08-$1.16 for the full year ending Jan. 5, 2003, and outlined next year's growth plan of 150 to 175 new stores.

After acquiring 48-store Video Update and several other chains, Dothan, Ala.-based Movie Gallery has opened a total of 475 locations in the past year, noted chairman and CEO Joe Malugen, who expects to open 140 stores this year, including 95 in the second half.

Malugen also noted there are still 4,000 markets identified for “further potential development” that fit the rentailer's preference for rural towns with populations less than 20,000.

After converting point-of-sale systems in the Video Update stores, the chain will change over all signs to the Gallery name within a year, Malugen said, and launch a direct mail campaign to expand consumer awareness in primarily upper Midwest markets where Video Update stores are concentrated.

“We're starting our first specific marketing efforts for Video Update stores in a couple weeks,” added CFO and EVP J. Steven Roy, noting the stores overall are meeting performance expectations. “Canada is slightly above plan and the U.S. is slightly below, but on totality we're on plan and are pleased with the results of those stores,” he said.

Movie Gallery also upped expectations for EBITDA, or earnings before interest, taxes, depreciation, amortization and one-time charges, to $73 million to $78 million for the year, from $70 million to $75 million. The chain expects same-store sales to remain in the “low single-digit range” for the quarter and remainder of the year, although Roy noted that “comp” sales might climb thanks to several strong weeks remaining in the second quarter.

“There are six weeks left in our quarter with the seasonally high period of June, including the Fourth of July week in this second quarter, so we clearly have high hopes – especially given the release schedule for rest of quarter – that comps will come in above target,” Roy said.

Analyst Robert DeLean with Morgan Keegan, said Movie Gallery's recent stock offering provides capital for paying off debt while funding acquisitions and new store openings as part of the chain's ambitious growth targets.

Gallery has been “bulking up” on its inventory of games, which represent about 11 percent of revenue but are expected to grow to about 15 percent, he said.

“If you believe we're in the second year of a five-year cycle then obviously that's going to be a fantastic growth business for the next few years,” he said.

Movie Gallery, like other chains. faces the challenge of managing VHS inventory over the next four to five years as DVD continues to replace the format, DeLean said. However, since Movie Gallery slightly lags the industry with DVD rentals representing some 25 percent of revenues, due primarily to its rural locations, Delean expects the chain to easily meet the new earnings targets.

“The signal is business trends continue to be very favorable,” he added. “If you believe that then the guidance range of $1.08 to $1.16 per share is still pretty conservative.”

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