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Gallery to Close 51 Game Crazys; Warns on Q2

22 Jun, 2005 By: Holly J. Wagner

Movie Gallery stock took a pounding on the heels of a weaker-than-expected second-quarter forecast and the announcement it is closing 51 of Hollywood Entertainment Corp.'s underperforming in-store Game Crazys.

Shares dropped from a high of $34.13 to $27.84 June 21, then rebounded slightly to $28.03 by June 23.

The movie release slate is weak and shows no sign of letting up, chairman, CEO and president Joe Malugen said.

“For the second quarter of 2005, we were originally forecasting our same-store sales to be down slightly; however, the recent weakness in the home video release schedule is having a significant adverse impact on our results,” he said. “In addition, with the theatrical box office in its 17th week of a slowdown and enduring its worst slump in two decades, we believe that the flow-through of an unimpressive slate of titles will continue to adversely impact our stores in both the rural and urban markets over the next few months.”

The Game Crazy closures will be completed by the end of the month and are part of maximizing efficiencies, Malugen said. Gallery will also rebrand its 23 Game Zones under Hollywood's Game Crazy label.

He also announced the appointment of Timothy R. Price to EVP and CFO of the company. Price had been Hollywood Entertainment's EVP and CFO since January 2003. Pre-merger Gallery CFO Ivy M. Jernigan will remain as an SVP and will continue to serve as CFO of Movie Gallery U.S., a subsidiary, according to a filing with the Securities and Exchange Commission.

“We are very pleased with the integration process to date,” he said. “We have aligned and are consolidating several key areas such as store development, legal, Game Crazy, distribution and finance. Our leadership teams are now in place, and we are moving quickly on targeting efficiencies and implementing best practices.”

Wedbush Morgan Securities analyst Michael Pachter expressed dismay at Gallery's failure to offer concrete guidance for the company since its merger with Hollywood, but is still optimistic about the combined company and maintained his $35 price target.

“We think investor reaction to [the] announcement reflects confusion over the void of information about the merger,” Pachter wrote in a note to investors. “In our view, either management is right, and the negative comps are driven by a weak release schedule, or management is wrong, and the negative comps are driven by poor execution of the integration. In either case, we view the adverse impact to be transitory, and believe the company will realize the full benefits of the combination with sustainable positive comps beginning no later than next year.”

In a separate announcement June 23, Gallery said it will pay a quarterly dividend of 3 cents per share to shareholders of record July 12, payable July 26.

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