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Movie Gallery Posts Record Revenue in First Quarter

4 May, 2004 By: Holly J. Wagner

Movie Gallery had record revenue of $203.3 million and net income of $18.3 million for the first quarter ended April 4, but the revenue increase was largely dependent on a 23 percent increase in the chain's store base.

Revenue for the quarter was up 20.6 percent from $168.6 million in the year-ago quarter, while net income increased 37.6 percent from $13.3 million in the first quarter last year, executives said.

While there are six titles that did $100 million-plus at the box office due out in the second quarter, that isn't the best measure of video's prospects, chairman and CEO Joe Malugen said.

“Our sweet spot is those movies that did between $50 million to $80 million. A lot of people didn't see them and because of the value proposition of home video, decided to see them anyway,” he said. “We'd like it if they were all $50 million to $80 million.”

Although the chain plans to spend $5 million over the course of the year to test new initiatives, the figure is a mere fraction of the $70 million to $90 million Blockbuster executives have pledged to spend on its new initiatives.

"As previously announced, during the last half of 2003 and early 2004 we have been experimenting with various alternative delivery vehicles for movie content. As anticipated, these initiatives lowered our net income and adjusted net income for the first quarter by approximately 3 cents per diluted share,” Malugen said.

Online rental isn't in Movie Gallery's near future, at least not in the form consumers have come to know today.

“We are not looking at a Netflix business model. Quite frankly I have never been that excited by it,” Malugen said. He also told analysts, “The more time we spend investigating these opportunities, the more we believe in the core business — our video rental stores.”

At Movie Gallery, testing is less aggressive, partly because competitive threats from video-on-demand (VOD) and other new technologies is less of a threat in the rural and secondary markets that are Movie Gallery's stronghold, where cable companies and broadband providers have trouble achieving an economy of scale, executives said.The chain is testing Game Zone stores within stores at 15 locations and is testing used disc trades for store credit in fewer markets than that, although executives would not say how many or which ones.

Movie Gallery added a net 82 stores by opening 81 new stores, acquiring 24 stores and closing 23 stores, executives said, adding the chain plans to open another 300 stores this year. To date, the chain had 2,240 stores at the quarter's end, up from 1,823 at the end of the 2003 first quarter and surpassing Hollywood Video's store count by February.

“Movie Gallery began 2004 on a strong note, with significant profitable growth to the high end of our earnings guidance for the quarter,” Malugen said. “We were especially pleased with our stronger-than-expected same-store sales of 2 percent for the first quarter, following double-digit growth for the first quarter last year.”

DVD accounted for 70 percent of rental revenue, CFO Ivy Jernigan told analysts. Although new movie sales were down from the comparable quarter a year ago, she attributed that to a weak first quarter slate of titles and to the company's strategic decision to buy less new-release product for sellthrough,

“We believe that as DVD penetration advances, customers who want to own a particular title will increasingly take advantage of the value proposition of previously viewed versus the price of a new copy of a [premium] release,” she said.

The company raised its revenue guidance for the year to a range of $785 million to $805 million and affirmed its previous projection of a 15 percent to 20 percent increase in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) as well as its guidance for adjusted net income per diluted share of $1.76 to $1.86.

The company expects same-stores sales for 2004 in a range of flat to a 3 percent increase.“Movie Gallery's first-quarter results are a further demonstration of our ability to produce consistent, sustainable growth,” Malugen said. “We believe the long-term prospects for our core movie and game rental operations in small towns and rural markets throughout North America remain very attractive and that there is no other company positioned as well as Movie Gallery to expand in these highly fragmented markets.”

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