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Movie Gallery Cautiously Changing Rental Model

4 Aug, 2004 By: Holly J. Wagner

Movie Gallery is testing in-store subscriptions, developing a trading model, extending its rental period from one or two nights to five nights in another 500 stores and doubling its Game Zone store-within–store to 30 by the end of the year, executives said today.

Movie Gallery is testing subscriptions priced at $19 and $24 in “a couple of markets,” CEO Joe Malugen said.

“I'm not overly optimistic about it,” he said. “We'll see in the next quarter or so whether or not there is a lot of interest in it….It's a niche. If we need it, we will put it in. I'm not sure there is an awful lot of demand for it, though.”

Movie Gallery does not plan to get into online rentals, he said.

‘”I don't believe a large percentage of the population is going to plan their movie viewing as Netflix requires,” he said. He acknowledged online rental as a significant niche, but said the increasing number of players in online rentals reduces opportunities for others.

The chain offers long rental periods in a little more than half of its 2,331 stores, but will extend that to 500 more stores by year's end, following a strategy similar to Hollywood Video's five-night rentals.

“[The move will] expand the geographic parameter of our customer base to have a longer rental period. Customers who don't live as close to our stores are then able to rent more than maybe they did before,” said CFO Ivy Jernigan. Customers who have to travel to the stores rent more titles per transaction with the longer term, she added. Expanding the five-night rental offering will require an investment in inventory to sustain the longer rental periods, executives said.

Game Zone units are promising, but mainly for the higher-traffic stores, Malugen said.

“Customer demand and excitement surrounding our Game Zone stores has been outstanding,” Malugen said. “We have seen significant increases on the stores' revenues and performance — especially as we refined our development model for this concept.”

Executives still aren't giving many details of the “alternative delivery systems” in which the company is investing. That investment has been $2.3 million so far this year.

“We have taken a minority interest in several start-up companies that are trying to develop alternative delivery vehicles for movie content,” Malugen said. Projects range “from retail delivery of DVDs to physical delivery of content into the home and other locations.”

Like Blockbuster, Movie Gallery expects rentals to suffer in the third quarter as viewers defect to the Olympic Games. Executives also said a weak release slate for the third quarter may reduce rental demand.

Quarterly income rose to $10.6 million, or 32 cents per share, from $9.5 million, or 28 cents, in the same quarter a year ago. Excluding a 4-cent-per-share charge for expenses related to the new initiatives, executives said the chain's earnings would have been $12 million, or 36 cents per share.

Total revenue rose 18 percent, to $189.6 million, from $161 million, with rental revenue up 18 percent, to $175.2 million, and product sales rising 16 percent, to $14.4 million, mainly on growth in the store count.

Malugen said Movie Gallery added a net total of 91 stores during the quarter, opening 75 new stores, acquiring 31 locations and closing 15 stores, ending the period with 2,331 total sites compared with 1,936 stores at this time last year.

The chain expects to open another 400 stores next year, primarily with new and smaller sites. Executives noted the acquisition environment of the past few years has thinned the ranks of small chains to acquire.

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