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Gallery Posts Loss, Plans New Moves

10 Nov, 2005 By: Holly J. Wagner

Movie Gallery may look to shed or gain a partner for its Game Crazy stores and will expand its fledgling DVD vending machine program to fatten up the bottom line.

The No. 2 chain posted a $12.5 million net loss in the third quarter (ended Oct. 2), compared to the same period in 2004.

Movie Gallery also plans to offer rental customers the option of mailing back discs, in a nod to the convenience of competitors' online rental and no-late-fees policies.

CEO Joe Malugen said the mail-return policy, launching in the fourth quarter, doesn't change his position against migrating to an online rental model.

Game revenue, which already is suffering as tight-fisted consumers await the next-generation consoles, is expected to drop due to the widely reported shortage of Xbox 360 consoles, he said.

“We are exploring a wide range of strategic alternatives for our Game Crazy business,” Malugen said.

The company is evaluating subletting some of its stores, which executives said average 6,000 square feet — more space than it takes to support rentals in the present environment. The average Movie Gallery store has three years left on its lease, while the average Hollywood store has six years to go.

The company saw $572.4 million in combined revenue from Movie Gallery and Hollywood Video stores. Contributing to the loss were expenses related to the Hollywood acquisition, Hurricane Katrina and non-cash charges related to stock-based compensation.

“Rental revenues have continued to decline over the last several months, and the market weakness we are currently experiencing has been more severe and longer lasting than anticipated,” Malugen said. “In response, we have taken, and will continue to take, decisive action to reduce our cost structure, leverage the company's purchasing power and streamline the organization.”

Malugen blamed the weak release slate and “maturation of the DVD lifecycle and the overabundance of DVD titles available in the marketplace” for the decline in rentals and sales of previously viewed titles.

Same-store revenue for the combined company declined 9 percent from the same period in the prior year. Same-store rental revenue declined 10.3 percent, and same-store product revenue declined 2.2 percent.

Comparing the Hollywood and Gallery units, same-store revenue was down 9.8 percent at Movie Gallery and 8.6 percent at Hollywood Video stores for the quarter. Same-store rental revenue was down 10.8 percent from last year's quarter, though sales increased 2.5 percent at Movie Gallery stores; rental comps fell off 10.1 percent and sales slipped 3 percent at Hollywood Video stores.

Gross margins slightly improved, and executives credited adjustments to purchasing to reflect lower rental traffic.

Among the biggest concerns going forward is getting customers back into stores after they have gotten out of the habit, Malugen said.

The company is using vending machines in some stores to extend hours and has lined up tests for Hollywood-branded machines in grocery and convenience chains, expected to roll out within 45 to 60 days.

“We strongly believe that this program will further improve the consumer's experience in our stores and extend the reach of our brand as we introduce the concept into grocery and convenience stores,” Malugen said.

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