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Hollywood, Movie Gallery Report Q4 Sales Gains

8 Jan, 2004 By: Erik G., Holly W.

Hollywood Entertainment Corp. and Movie Gallery, the No. 2 and No. 3 rentailers, respectively, have reported steady same-store sales gains and divergent rental comps.

Despite a 14 percent increase in same-store merchandise sales, Hollywood said eroding same-store rentals negatively impacted quarterly results (ended Dec. 31, 2003) and are projected to dampen earnings in 2004.

Hollywood, which will release actual fourth-quarter and fiscal-year 2003 results Jan. 29, said it saw a 2 percent decline in same-store rentals for the quarter despite an 8 percent rental increase in early December.

“Rental comps for the last two weeks of December, when we [get] some of our most significant revenue, fell an unexpected 9 percent,” said Mark Wattles, founder and CEO of the Portland, Ore.-based rentailer.

Hollywood's earnings per share for the quarter were 36 cents, down from a projected 38 cents to 40 cents.

By contrast, the ongoing product shift to DVD, a strong fourth-quarter release schedule for new movie titles and favorable currency exchange rates in its Canadian operations helped same-store revenue at Dothan, Ala.-based Movie Gallery increase 6 percent in the quarter ended Jan. 4.

The results, which included a 5.5 percent increase in same-store rental revenue, prompted Gallery to revise upward its guidance for adjusted net income per diluted share for the quarter to at least 49 cents from the prior announced range of 45 cents to 47 cents.

Movie Gallery will release final financial results for the fourth quarter and year Feb. 19.

Rentals Drop at Hollywood?
Based on information gleaned from focus groups, studios and independent researchers, Hollywood Video's Wattles said the company's “macro groups” of light, medium and heavy users are renting less — with the heavy user group decreasing the most with each new DVD release.

“Many of our DVD renters who have previously increased rental spending from prior VHS levels have decreased their rental spending [when switching to DVD],” Wattles said. “That is definitely something new at Hollywood Video. There is no doubt that the purchase of DVD movies is negatively impacting our rentals.”

Dennis McAlpine, president of McAlpine & Assoc. in New York, said the shrinking rental market shouldn't come as a surprise. “The rental business for the industry has been down for several years,” McAlpine said. “Even with increases in DVD, the declines in VHS have been greater. And I think you are just seeing a continuation of that.”

McAlpine said Internet-based rental service Netflix has successfully siphoned away a significant number of customers.

Wattles said the company plans to launch subscription programs for videos and games, which he said, without elaborating, would increase customer spending.

“Suffice to say, we won't be sitting still watching our [same-store] comps decline,” he said.

McAlpine said Hollywood should pursue studio revenue-sharing plans to offset rental losses.

Last month, Hollywood predicted flat-line same-store rental comps for 2004, with 33 cents to 37 cents in per-share earnings for the first quarter and 5 percent earnings growth.

“We now believe there is risk in that forecast,” Wattles said.

Games a Savior?
With sales at in-store Hollywood Video subsidiary Game Crazy a big part of same-store sales, CEO Wattles said the company will continue to invest in the concept, which he said could generate $250 million in revenue in 2004.

Hollywood operates about 600 Game Crazy outlets. Total Game Crazy revenue in 2003 was $180 million, which nonetheless represented a $17 million loss to overall earnings. “As the businesses continue to grow, [they] will continue to negatively impact earnings in 2004,” Wattles said.

McAlpine cautioned that most video game platforms have been on the market “for a while” and suggested there are mixed feelings within the game industry as to whether 2004 is going to be a good year.

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