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Movie Gallery Prognosis Bleak

9 Mar, 2006 By: Holly J. Wagner

Shares of Movie Gallery plummeted as low as $1.68 March 9 — the lowest level since January 2001 — after an analyst slashed his target price from $3 per share to $1 and said the company is at risk of bankruptcy this year.

Bear Stearns analyst Glen Reid had previously estimated the company could be in danger of negative cash flow some time next year, but amended that opinion in a note saying the company could face a cash crisis much sooner because of declining rentals and $1.1 billion in debt following the Hollywood Video acquisition.

“Our prior estimates had assumed that Movie Gallery would show negative cash flow beginning in 2007, given the twin challenges of declining same store sales and an oppressive debt load,” Reid wrote. “Now we believe this will happen in 2006.”

He cited a report from Debtwire as saying that Gallery has been seeking relief from its agreements for the rest of the year.

CEO Joe Malugen announced Feb. 6 that executives would meet with lenders. Since then the stock has been volatile, but holding in the mid-$3 range until this week. The company amended an $870 million credit agreement in September, and Reid said, “it appears that those revised covenants were not enough.”

A Gallery spokesman has not returned calls seeking comment.

Gallery's shares have been on a steady slide, from their 52-week high of $34.13 last June to as low as $1.68 in early trading March 9, even as the company seeks to renegotiate its debt agreements. That freefall came just a day after shares lost 64 cents, or 20.6 percent, to close at $2.47.

Reid joined the ranks of analysts and observers citing Gallery's refusal to enter the United States online rental market as one of its risks.

“With online rentals taking a share of in-store rentals, in-store declines could be double-digit – well below our prior forecast of mid-single digits,” he wrote. He also pointed to Blockbuster's pot-sweetener for online rentals as putting pressure on store-based business. Blockbuster doubled the number of free in-store rentals for online subscribers last month.

A credit amendment, if approved, would become effective March 15. Reid's analysis factored in higher interest rates the company would have to pay if it succeeds. His longer-term prognosis for Gallery was bleak.

“Should the company obtain relief, Movie Gallery equity could survive for a period of time,” he wrote, “nevertheless, we believe that a restructuring is ultimately necessary.”

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