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Movie Gallery Hones Business in Summer Rental Slump

10 Aug, 2006 By: Jessica Wolf

The traditional summer rental slump and a slate of weak box office titles hit No. 2 chain Movie Gallery in the second quarter, as the company remains in the throes of infrastructure changes that includes potential closure of 175 stores.

The company reported a net loss of $14.9 million for the quarter ended July 2, 2006, compared to a net loss of $12.2 million in Q2 2005. Revenue was $601.3 million, up 19% from the prior year's $504.7 million. (Movie Gallery acquired Hollywood Entertainment Corp on April 27, 2005. On a pro forma basis, combined revenue would have been $637.5 million in the second quarter of 2005.)

Same-store sales in the quarter decreased 4.6% overall for the chain. Same-store sales at Movie Gallery branded locations were up 1.6%, largely attributed to the company moving previously viewed stock from Hollywood through those rural stores, said interim CFO Tom Johnson. Sales of previously viewed discs made up about 80 basis points of that positive result, he said.

The company also launched some “grass roots” local marketing and promotional campaigns and in-store customer service best practices that helped give the Movie Gallery stores a boost, said company president and CEO Joe Malugen. The company plans to extend those across Hollywood Video-branded stores as well, he added.

Year-to-date net income stands at $25.5 million. Revenue for the first half of the year is $1.3 billion, compared to $738.5 million in 2005.

Movie Gallery is taking “decisive action” to improve overall performance, Malugen said. All studios are shipping product to the chain and its revenue-sharing deals remain intact, he said.

The company hired consultants Merrill Lynch & Co. and Alvarez & Marsal Inc. to help with financial reporting and turnaround. As of July 2, the company was in compliance with its creditors.

Movie Gallery plans to reduce its overall rent expenses by 15% to 20% by closing redundant and underperforming locations (175 total closures planned for this year, mostly Movie Gallery stores), subleasing store space to outside companies, and whittling down store footprints by about 2,000 square feet for Hollywood locations and 1,200 square feet for Movie Gallery stores.

The chain has 110 approved sublease deals, 187 pending agreements and 573 letters of intent, Malugen said.

Those deals take time though, Malugen said. The chain will not see positive results from its store restructuring plans until 2007 and into 2008, he said.

Movie Gallery has about 25 rental kiosks in operation, which the chain is pleased with, Malugen said. But there are no immediate plans to expand that trial number, he added.

“We're continuing to look at it,” Malugen said. “It's not fair to say we've drawn any conclusions about whether it's a good long term business, but we are optimistic about its prospects.”

The chain has cut more staff than its original target of 17%, or 300 positions. The company had reduced its force by 380 salaried and administrative personnel as of the end of the second quarter.

The rest of the summer and September will remain slow, but the chain is looking forward to the current box office slate hitting DVD in the fourth quarter, Malugen said — naming X-Men: The Last Stand, The Da Vinci Code, Cars, Over the Hedge, Mission: Impossible III, Pirates of the Caribbean: Dead Man's Chest, Superman Returns and Ice Age: The Meltdown, among others.

“What we've called the worst box office slump in history seems to be abating,” he said. “We expect that successful movies like these will help create momentum, increase store traffic and give us a jump start in the fourth quarter.”

New game platforms and new high-definition formats HD DVD and Blu-ray could have some positive impact on the overall business, he said.

For now, Gallery does not see emerging Video-on-demand offerings as too much of an immediate threat, Malugen said.

“Home video is still convenient, low-priced entertainment,” he said. “I don't think demand for that is going away very soon.”

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