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Movie Gallery Plans Changes in Wake of Low Q1

11 May, 2007 By: Jessica Wolf

Movie Gallery has some ambitious plans to turn around the chain's fortunes, executives said today as they announced first quarter results punctuated by big drops in same-store sales.

Movie Gallery's posted a net loss of $14.9 million in the quarter from total revenues of $647.7 million, a decrease of 6.7% from $694.4 million in the first quarter of 2006.

Gallery spent $6.3 million in the quarter on its plans for its previously announced revamped Web site, with digital downloads and streaming, and on the summer beta launch of its “True Choice” online rental program.

By next year, executives said, Gallery should be in the digital-downloading game with a new-generation Moviebeam set-top box that will allow users to download or stream both standard-definition and high-definition moves by purchase from Gallery's Web site, or via a broadband-connected Moviebeam box.

Gallery has digital deals in place with “most” of the major studios and is working on getting the rest into the fold, Company president and CEO Joe Malugen said.

The chain also plans to offer direct physical sales from the Moviebeam box, allowing shoppers to purchase DVDs from their TV for home shipment.

“We believe we will be the only company providing a true-choice content option, from in-store sales, download to the computer, download to the TV or through online purchase,” Malugen said.

Same-store total revenues declined 4% at Movie Gallery branded stores and 6.8% at Hollywood branded stores in the first quarter. Same-store total revenues at the Hollywood brand were impacted by a 13.1% decline in same-store revenues at the Hollywood Video segment, which was partially offset by a 26.4% increase in same-store revenues in the Game Crazy segment. Overall same store sales were down 5% for the quarter.

The chain cut 184 stores in the quarter, operating at a 4% smaller store count over the prior year, which added to same-store sales declines.

Gallery also took a hit to gross margins thanks partly to a 17% decrease in previously viewed DVD pricing.

The average price of pre-viewed DVD dropped from $7.92 last year to $6.60, said company EVP and CFO Thomas Johnson.

Gallery is feeling some pressure from competitor Blockbuster and it's low Total Access scheme, but Gallery is largely staying out of the aggressive pricing game, Malugen said.

An ultra-competitive Blockbuster can't totally be blamed for the same-store failures at Hollywood Video branded locations, he said, pointing out that one third of Movie Gallery brand stores are in direct competition with Blockbuster locations and experienced smaller same-store declines.

The company is focused on turning around the Hollywood Video brand, the first step Gallery's recent restructuring of operations, which brings store operations for the Hollywood segment into the same fold as Movie Gallery stores, under Jeff Stubbs as president of retail operations.

With all the experimentation going on in the market, from digital downloads to the Comcast simultaneous VOD DVD test, Malugen said Gallery is committed to being a strong partner for studios who still glean the bulk of revenue from the video market.

He said, given that, he thinks studios will discover how important it is to preserve video windows.

“I think the general consensus is that VOD will cannibalize DVD sales and I think there are very few people who believe it would not,” Malugen said. “I don't think at the end of the day it will make good sense for windows to shrink.”

The chain also is set to expand its Hollywood Video Express kiosk concern, which has been in a small testing phase for several years.

Gallery will open 200 more kiosk locations this year, primarily in grocery store locations and other high-traffic areas, focusing on markets where the company has already seen kiosk success.

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