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Hollywood Rentals, Sales Lag; Plans to Go Private in Limbo

7 Oct, 2004 By: Erik Gruenwedel

The continuing rental slump is taking a toll on the nation's No. 2 rental chain.

Hollywood Entertainment Corp. reported it expects same-store rentals for the third quarter to drop 8 percent.

For the quarter ended Sept. 30, the Portland, Ore.-based retailer also expects a 3 percent drop in same-store sales of movies and video games, the latter at its in-store Game Crazy units.

In January, founder and CEO Mark Wattles noted a risk to projected flat same-store rental comps for 2004, and said he expected sellthrough of video games and movies to offset shrinking rentals.

Though Hollywood announced revived negotiations on a deal to take the company private, it remains to be seen how the quarterly results will affect that deal with private investors.

“[This] will make the odds of that deal going through a little bit thinner,” said Dennis McAlpine, analyst with McAlpine & Assoc. “While we decry the slightly negative comps, Blockbuster has had those for a year. Unless the numbers are big, it is certainly not dreadful for anybody.”

Hollywood, unlike rival Movie Gallery, made no mention of the recent hurricanes in Florida as a possible cause for sales and rental declines.

In a statement, Hollywood said it was mulling “possible amendments” to the merger agreement with investor Leonard Green & Partners, including a reduction in the price.

The pending deal, which has been beset with a shareholder lawsuit, received another hit last month when a principle investor demanded, among other things, that Hollywood repay a $21 million loan (including interest) given to Wattles in 2000.

McAlpine said analysts remain in limbo.

“Right now, we are trying to figure out what Hollywood is,” he said. “Are they public, private? Are they being sold? What's going on with the whole thing?”

The company said it would report complete quarterly results by Oct. 21.

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