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HIVE EXCLUSIVE: The Sleeping Giant

27 Jul, 2001 By: Joan Villa

In what one analyst has called “the retailers having the last laugh over the dot-coms,” Movie Gallery’s stock surged $2.95 to $25.25 on lastweek’s news that it will split 3-for-2 next month. The move, which caps a meteoric rise from $2 per share just six months ago, is yet anothersignal to Wall Street that the Dothan, Ala.-based chain is a sleeping giant that commands attention.

“I think what’s triggered this is the implosion in telecom and technology,” observes Bob DeLean, analyst for Morgan Keegan, which hasfollowed the chain since its initial public offering. “Earnings domatter.”

Gallery is finally vindicated for its conservative fiscal philosophy of steadily growing revenues and earnings in the secondary and ruralmarkets it dominates, he notes. And soon, the company’s clout will loomeven larger, with the recent takeover of bankrupt Video Update’s senior secured debt and the opportunity to bring more than 300 stores into theMovie Gallery fold.

“Movie Gallery has always been a fairly significant force in the market, but in recent months their stature has certainly come to the forefront,” says Marshall Forster, executive v.p., North America, for ColumbiaTriStar Home Entertainment. “On a per store basis, they still may buy less than Blockbuster or Hollywood, but they’re not trying to become aBlockbuster or Hollywood. They’re trying to dominate the smaller, rural markets, and that’s what they’re doing.”

Studio sources estimate Movie Gallery’s share of the rental market at nearly 5%, up from about 3.5% a year ago.

“They have grown very quickly, very efficiently and very quietly,” says Dick Longwell, senior v.p. of sales and distribution, Universal Studios Home Video.

Movie Gallery’s game plan for Video Update is as low key and laid back as its Southern home base. Without actually running Video Update ornegotiating studio revenue-sharing deals and purchasing terms, Movie Gallery’s strategy is to boost new releases but stay out of day-to-day management, says one studio executive. That way, the chain can still back out or close locations that fail to revive revenues. “They’re doing whatever they can to get Video Update back on its feet again and thenstrategizing how to best move forward” with a full acquisition, he adds.

The chain is also juggling personnel, tapping former Sight & Sound executive John Jump — an individual with a “unique perspective” on the“good and bad” as Update’s primary distributor through much of the 1990s, observes another industry insider — as chairman of the board. Jumprecently brought in former Mr. Movies executive Greg Eagle as director of purchasing.

Although Update has added inventory, Ted Engen, president of 2,000-storeVideo Buyers Group, based near Update’s Minneapolis headquarters, notes it has to boost customer loyalty and employee morale.

But considering that by July 1, Movie Gallery had spent a total of just over $11 million to acquire the bank debt on 380 stores and provide a debtor-in-possession loan — a fraction of the $79 million that VideoUpdate spent just three years earlier to purchase 267-store Moovies — the purchase is a bargain by almost any standard. If Movie Gallery keeps 300 locations, as chairman and c.e.o. Joe Malugen has suggested, each store will have cost less than $37,000.

The move will boost Gallery’s store count from 1,050 to more than 1,400 (No. 1 Blockbuster has 5,000 and No. 2 Hollywood has 1,800) and increase its presence from 31 states to 40. While not enthusiastic aboutcoast-to-coast ads, the company does expect to extend its promotional reach through partnerships a la Blockbuster and RadioShack or MCI. “Overthe past six years we have evaluated several programs similar to that and we’re currently evaluating that sort of approach,” Malugen says.

The direction that Gallery plans for the chain will get clearer when Update files its reorganization plan in the coming weeks. Executiveshave been evaluating locations and pondering such decisions as whether to convert the stores to the Gallery moniker. While Movie Gallery stores are 70% in “core” markets, fewer than 50% of Video Update’s remaining storefronts fall in those rural and secondary areas.

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