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Movie Gallery Q3 Comps Fall

4 Nov, 2004 By: Holly J. Wagner

Movie Gallery has opened 60 Trade Zone stores-within-stores and is on track to reach 30 Game Zones by the end of the year, executives said.

The chain suffered a difficult third quarter because of its heavy presence in the hurricane-plagued Southeast, a weak release slate and competition from TV viewing of events like the Summer Olympics, the World Series and the presidential debates, CEO Joe Malugen said, but he dismissed any impact from subscription models that other chains have rolled out.

“If there is any impact from subs that we might be seeing, it would be in-store subscriptions rather than online,” Malugen said, adding that any impact is in urban, rather than rural, markets.

To stay competitive with Blockbuster and Hollywood Video, which both offer some type of in-store subscriptions, Movie Gallery is considering offering its discount cards year-round, rather than only at certain times of the year, in more competitive metropolitan markets. The company will also increase its marketing efforts in those markets going forward.

Against the industry grain, Malugen said he does not believe subscription programs priced less than $22 a month can be profitable.

“It is my belief that the online rental business is about up to a $500 million business. That is based on the fact that the rental business in the U.S. is about $10 billion. I think it could be up to about a $1 billion business,” Malugen said, adding, “I don't think there is any way to make money in the online rental business under about $22, and anybody doing it for $17.50 is going to take a bloodbath.”

The company is continuing its efforts to develop alternative delivery systems, but executives said little about what form those might take or when a rollout should be expected.

“We've already cut bait on some, and we are pursuing others,” Malugen said. “It is important for us to pursue these sort of things. There are opportunities in delivering movies in other formats. While we believe that the movie rental business is going to be a strong business, there are other ways, and we continue to look into that.”

Going forward, executives expect a challenging fourth quarter, in part because the release slate includes one-third fewer $100 million-plus box office titles, down to 10 from 15 in the fourth quarter of 2003, and because Christmas and New Year's Day will fall on Saturdays this year. Executives anticipate that while revenue may be up overall because of new stores, same-store revenue may fall by 4 percent to 6 percent from last year's numbers, which will result in same-store revenue slipping by 1 percent to 2 percent for the year.

In this year's third quarter ended Oct. 3, total revenue was $189.9 million, an increase of 13.5 percent from $167.2 million in the year-ago quarter. Net income for the 2004 third quarter was $9.2 million, or 29 cents per diluted share, compared to $9.2 million, or 28 cents per diluted share, in the comparable period last year. Executives attributed the increase to an 18.5 percent increase in the average number of stores operated, partially offset by a 2.5 percent decrease from a year ago in same-store revenue.

“I must admit I was disappointed to see our string of 12 consecutive positive-comp quarters come to an end,” Malugen said.

Rental revenue for the quarter was $176.1 million, or 92.7 percent of total revenue vs. $154.6 million, or 92.4 percent of total revenue, in the comparable period last year. Same-store rentals were down 1.5 percent, according to CFO Ivy Jernigan. About 325 stores felt the effects of a punishing hurricane season.

“We're coming off a drought of $100 million titles for rental in our stores,” SVP of investor relations Tom Johnson said. “It's been 120 days since we had a big title – I'm throwing out The Passion of the Christ and Fahrenheit 9/11, neither of which were good rental titles for us.”

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