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Gallery Posts Strong 2nd Quarter Earnings

25 Jul, 2001 By: Joan Villa

Riding high from a $22-per-share stock price and a proven strategy ofdeveloping secondary markets, Movie Gallery has announced a 3-for-2 stock split payable next month and boosted revenue projections forfiscal 2001 to $355 million versus the $319 million reported last year.

True to its conservative management style, however, the nation's third largest rental chain projects same-store sales of 1% to 2% for the second half of 2001.Following a 1.4% same-store decline in the second quarter ended July 1, same-store sales for the first three weeks of July have alreadyclimbed into the "mid-single digit" range, says chairman and c.e.o. Joe Malugen. He attributes the increase to strong titles — primarily Hannibal, Family Man, Spy Kids and Chocolat — with box office receipts 35%higher than last year's third quarter releases.

"The fourth quarter is also shaping up to be better than last year," Malugen added during a second quarter earnings call. "Shrek, The Mummy Returns, Jurassic Park III and Pearl Harbor will lead the fourth quarter, and a good mix of these titles will be at lower sell-throughpricing."

The stock split, which is payable Aug. 31 to shareholders of record Aug.17, reflects company confidence and "will enhance trading of our stock by increasing its float," Malugen explains. "We're very pleased that investors have come to realize what we've always believed and that isthat broadband and video-on-demand are many, many years away."

Analyst Michael Salerno of Adams Media Research agrees that the stock split is a sign of confidence that will draw attention to the company's positive sales and generate more investor interest in both Movie Galleryand the retail sector. The split indicates "sales are up, we're doing well when everyone else is reeling," he adds. "The market has been going down, down, down forabout a year now and investors are looking for signs of light."

In response to analysts' prodding on the earnings call, Malugen acknowledged that studios could raise DVD pricing to a rental orrevenue-sharing model — a decision "the studios are certainly wrestling with," he says. But higher DVD prices will force the chain to purchase fewer DVD units, and he anticipates minor impact on revenues or income as a result. Malugen projects DVD will represent 20% of overallrentals by year-end, up from its current range of 12% to 13%.

"We're buying more copies than necessary to make sure we stay slightly ahead of consumer demand," explains executive v.p. and c.f.o. J. Steven Roy. "If they shift to rental pricing, at that point the increase in consumer demand will begin to flatten out some and we won't bepurchasing as much as you see today."

The 1,050-store chain reported 7.3% higher revenues of $83 million for the second quarter and 36.9% higher net income of $2.6 million versus the same period last year. Net income excludes anextraordinary charge of $177,000, or $.01 per diluted share, for the early extinguishment of debt and a non-cash compensation expenseresulting from variable stock options.

The chain added 52 locations in the first half, well on its way to growth of 75 stores by year-end. In addition, the Dothan, Ala.-based retailer recently acquired the senior secured debt of bankrupt Video Update, and will soon announce how many of those existing 380 locations will be added to the Movie Gallery roster when it submits a reorganization plan to the court next month, Malugen said.

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