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Movie Gallery Posts $552.7 Million Loss for 2005

23 Mar, 2006 By: Jessica Wolf

Movie Gallery as expected posted a $552.7 million net loss for 2005. The net loss for the fourth quarter was $546.5 million.

Same-store revenue decreased 8.6% for the quarter, compared to the same quarter in 2004, on the continued decline in the home video rental industry. Same-store revenue for the year fell 4.7% from 2004.

Total 2005 revenue was $2 billion, including 35 weeks of sales from Hollywood Entertainment Corp., acquired April 27, 2005.

A bulk of the net loss for both the financial reporting periods came from a $527.9 billion non-cash impairment of goodwill and other intangible assets.

"Fiscal 2005 was a challenging year for the industry and our company primarily due to a weak box office and, to a lesser extent, the continued growth of various alternative entertainment options and new technologies," said Movie Gallery president and CEO Joe Malugen. "Nevertheless, we continue to believe that the home video industry will remain a significant business for many years to come and our discussions with many of the studio heads continue to support our position regarding the value proposition of home video for both sell-through and rental.”

The company is already in the throes of changes designed to improve performance, executives said.

Movie Gallery will continue to evaluate and close underperforming stores or Hollywood Video and Gallery stores that overlap in communities. The company also plans to cut spending for the year, in part by limiting new store openings. The company will open only 140 new stores, which were already in the works in 2005. Gallery also plans to cut about 300 jobs starting from the date of the merger, mostly duplicative support staff from the acquisition of Hollywood.

The company also is quickly moving forward on its plans to downsize locations by subleasing space to other retailers, through Movie Gallery's recently announced partnership with Excess Space.

The company expects many of its Hollywood stores can be reduced from an average of 6,600 square feet to approximately 4,000 square feet, and that Gallery stores can be reduced from an average of 4,200 square feet to approximately 3,000 square feet.

The company has already gotten a lot of response on the sublease plan from “virtually every 1,000- to 2,000-square-foot retailer you can imagine,” Malugen said.

For “competitive reasons,” Gallery execs declined to name interested parties, but said that some large chains are looking at leasing bulk locations of 100 or 200 storefronts.

Obviously, the company is giving “preferential” attention to sublease retailers with their own strong customer base that could bring ancillary customers into the rental stores, executives said.

Malugen said they expect to see little or no revenue loss from shrinking store space for home video, as much of the shuffled space will be taken from VHS. He estimated that about 2000 square feet is still devoted to the tape format in some Hollywood Video locations.

The chain spends about $500 million each year on rental expenses, Malugen said. If the company can decrease the footprint of stores by 20% to 30%, rental expenses should drop by close to that percentage as well, he said.

As for high-definition discs, Movie Gallery execs said they don't expect to see much demand for them until the end of the year, and even then, it will be very measured excitement.

Still, high-def discs, with their potential $25 to $40 price apiece, could be a great shot in the arm for the rental segment of the industry, Malugen said.

“[But] there essentially won't be any demand for it in the early months [of launch],” he said.

Movie Gallery will be looking into rev-share agreements for high-def discs when the demand warrants a large supply of the software, he said.

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