Movie Gallery Near Insolvency10 Aug, 2007 By: Erik Gruenwedel
Movie Gallery Inc., the No. 2 domestic video rental chain, Aug. 10 warned it incurred significant losses in the second quarter (ended July 1), raising doubts it can meet its debt requirements and continue operations.
Gallery lost $325 million in the second quarter compared to $25 million during the same period last year, according to a filing with the Securities and Exchange Commission. Revenues fell 6% to $561 million, from $601 million last year.
In the filing, the company said non-compliance with its debt requirements resulted in vendors, including the studios, restricting credit terms in favor of upfront payment or cash-on-delivery (COD).
Gallery had extended until Aug. 14 a forbearance agreement with senior lenders after disclosing poor quarterly sales and less than $50 million in liquidity. But the company's latest financial discloser makes it likely it won't meet its extended obligations and creditors could begin foreclosure proceedings as early as Tuesday, said analysts.
The company's stock closed Friday down almost 18% to 37 cents per share.
“Today is the day the patient passed out,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles. “They are not quite dead yet but they are definitely passed out.”
Pachter said Gallery was beyond the point financially where current management could save it.
A Gallery spokesperson told Reuters the filing only reflected the second quarter and that the company was pursuing alternatives, including store closures and selling assets.
Dothan, Ala.-based Gallery, which operates more than 4,500 stores, has been struggling since it outbid No. 1 Blockbuster Inc. in 2005 and paid $1.1 billion to acquire then No. 2 Hollywood Video.
Subsequent flat years in the DVD movie rental business coupled with Blockbuster and Netflix Inc.'s successful establishment of an online DVD rental market crippled Gallery, which had no online component.
“They cut their wrists when they bought Hollywood,” Pachter said. “They didn't cut the [major] arteries and have been slowly bleeding to death ever since.”
Pachter said after the dust settles he envisions Gallery resurfacing as a rural DVD rental chain with Hollywood Video locations severely reduced.
He wondered who would bail out the company considering the current credit crunch among private equity firms, which he said often step in when conventional forms of capital are unavailable.
“I don't see the same landscape for a private equity firm buying even the Movie Gallery branded stores, which are probably well-performing stores,” Pachter said. “I don't know who would buy them.”
He said the upside to Gallery's woes would mean fewer movie rental locations resulting in a net benefit to Blockbuster, Netflix and independent video stores.
“Everybody who stays in business will pick up business,” Pachter said.