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Gallery, Hollywood Merger on Fast Track

12 May, 2005 By: Holly J. Wagner

Blockbuster Inc.'s “no late fees” campaign has had little impact on its major competitors, even as they move quickly to integrate into one organization, Movie Gallery executives said today.

Movie Gallery may even benefit from the bad publicity that “no late fees” received, said CEO Joe Malugen during an analysts briefing today on the company's first-quarter results, which saw a 15 percent increase in revenue.

“As is evident from the press and the activities of the different states, it had some negative connotations to it,” Malugen said. “It was a wash.”

The best indicators of success for competitors' promotions lie with the store directors, SVP corporate finance Thomas Johnson said. If those promotions are successful, the directors will contact their district managers, who will then ask to replicate that program.

“We have not received our first call,” Johnson said. “In fact, we have received calls from our DMs asking us not to do that program because they are getting in a lot of customers who feel they have been misled.”

Just two weeks after the deal to acquire Hollywood Entertainment Corp. closed, the executives declined to give guidance for future performance so soon.

“Given that the ink is barely dry on this merger, we cannot comment on what changes we will make or what effect they might have,” Malugen said.

But he said they are working to integrate the companies as quickly as possible, starting with Hollywood's Game Crazy business. The chain is moving quickly to merge Game Crazy operations, which had operated as a separate company within Hollywood Video, into the larger company. To date, 32 people have been laid off, and a few more layoffs in back office positions are expected, Johnson said.

“The attention to Game Crazy was because it was losing money. I don't like to lose money, so that was where I paid the most attention,” Malugen said.

Although Movie Gallery plans to open 400 new Movie Gallery stores and another 50 to 70 new Hollywood stores this year in addition to completing the acquisition of VHQ in Canada, plans also call for closing 20 to 40 of 715 Game Crazy stores. The chain in addition intends to rebrand its 22 Game Zone stores under the Game Crazy brand.

The executives disputed Blockbuster CEO John Antioco's recent dire predictions for the rental industry.

“We would have to take a position somewhat different from what Mr. Antioco was saying. We have not seen the types of things he was describing, and we do have a number of stores across the street from them,” Malugen said.

Over all, the integration process is moving smoothly, the executives agreed.

“We are more positive about the transaction today than we were at close,” Johnson said. “We are finding opportunities that, quite frankly, we had not built into our model. One of those is in the distribution side. We think that [Hollywood ] could significantly help distribution to our [Movie Gallery] stores.”

Analysts also seemed pleased with the results.

“They seemed pretty positive and are moving pretty fast to get things together,” said Dennis McAlpine of McAlpine & Associates. “Between VHQ and Hollywood deals, plus opening 450 new stores, they will be kind of busy.”

For the first quarter of the fiscal year ended April 3, Movie Gallery reported total revenue of $233.8 million, an increase of 15 percent from $203.3 million in the first quarter of 2004. Rental revenue was $216.7 million, or 92.7 percent of total revenue, vs. $186.8 million, or 91.9 percent of total revenue, in the first quarter of 2004. Comp-store rentals were up 4.4 percent, with DVD accounting for 85 percent of rentals, vs. 70 percent in the 2004 first quarter.

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