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Movie Gallery Reports 12.4% Higher First-Quarter Sales

7 May, 2001 By: Joan Villa

In part due to a hefty 300% spike in DVD revenues over the last year and a few well-timed snow and rain storms in January and February, Movie Gallery reported 12.4% higher first quarter sales of $91.6 million and a 3% boost in net income to $4 million for the 13-week period ended April 1.

DVD, which currently represents about 9% of revenue, is expected to reach “double digits” during the year, according to chairman and c.e.o. Joe Malugen.

The 1,031-store chain expanded its store base 7.4% from the same quarter last year, and is virtually the only national chain planning significant growth of 75 store openings for 2001. According to c.f.o. J. Steven Roy, 24 were already opened in the first quarter, 20 are planned for the next three months, and the remainder are planned for the second half, compared to 7 to 15 closures in each quarter this year.

Malugen credited the chain’s tight rein on operating costs and closure of underperforming locations for having a positive impact on first-quarter earnings. Movie Gallery has emphasized previously viewed tape and DVD sales and “strategically reduced” new sellthrough product for a cost savings of $7 million compared to last year’s first quarter, he adds.

As previously reported, Movie Gallery took a one-time $1.6 million charge for a payment to Rentrak Corp. as part of a contract renegotiation that gives the Dothan, Ala.-based retailer more “flexibility” in purchasing. Another $811,000 one-time charge was taken in the quarter for a non-cash compensation expense as a result of repricing stock options.

Looking forward, Movie Gallery expects a rocky second quarter with negative single-digit same-store sale comps primarily due to the lack of the kind of strong product that produced sales growth of 8.5% last year, Malugen says. Game rentals will also be down until the second half “when more penetration from PlayStation 2, and the launch of Microsoft Xbox late in 2001, are expected to provide new growth,” he adds.

“These cycles do not dampen our enthusiasm about our industry or the opportunities in front of us,” Malugen says. He predicts same-store sales growth will resume in the third quarter, finishing the year overall with sales increases of 1% to 2% and total revenues of $350 million.

The c.e.o. also sees the possibility of a writer’s strike this month as “very likely” but doesn’t anticipate a negative impact on video unless the walkout “extends nine months or longer.” In the short term, video could benefit from a “positive effect in that there would not be network television programs of high quality” during the strike, he says.

The chain is also in the final stages of negotiating a new credit facility with more flexibility in financing stock repurchases, according to Malugen. The goal is to have the new facility in place by the end of June, he says.

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