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Movie Gallery Reports Q2 Revenue Slump

19 Jul, 2005 By: Holly J. Wagner

Second-quarter 2005 same-store revenue slumped 5.5 percent and rentals slipped 8.4 percent at Movie Gallery as the chain for the first time absorbed numbers from the Hollywood Entertainment Corp. acquisition.

The shortfall prompted executives to scale back new store openings for the year to 300 from earlier projections of 400.

Same-store rentals were off 8.7 percent at Movie Gallery stores and 8.2 percent at Hollywood Video stores. Same-store sales were down 1.2 percent at Gallery stores and 12.9 percent at Hollywood stores.

“We were disappointed to see that our same-store revenues in both the rural and urban markets were adversely impacted by the weak home video release schedule,” said chairman, president and CEO Joe Malugen. “Coming into the quarter, we were internally forecasting our same-store revenues to be down slightly; however, for the month of June our same-store rental revenues were down 12 percent, which was significantly softer than anticipated. Although we have seen some improved trends over the past few weeks, we believe that the continuation of an unimpressive slate of titles will adversely impact our business in both the rural and urban markets during the third quarter.”

Strong theatrical performers including Batman Begins, Star Wars Episode 3, War of the Worlds, The Island, Mr. and Mrs. Smith and Fantastic Four should help the fourth quarter out of the malaise, Malugen said.

Although optimistic for the new second-largest rental chain, Malugen postponed guidance for the rest of the year until the company's second-quarter financial call Aug. 12.

During the second quarter, the company completed the acquisitions of Hollywood Entertainment Corp. and VHQ Entertainment Inc., ending the quarter with 4,710 stores throughout North America: 4,430 stores in the United States, 273 stores in Canada and seven stores in Mexico.

Despite the uncertainties, Movie Gallery stock was up 68 cents, to $25.90, in midday trading.

Analyst Michael Pachter of Wedbush Morgan Securities retained his buy rating and his $35 price target on the stock.

“The rental comps of minus 8.4 percent was better than our minus 11 percent rental comp estimate, but the merchandise comp of plus 10.6 percent was lower than our plus 16 percent estimate. The overall comps of minus 5.5 percent was lower than our minus 2 percent estimate,” Pachter said. “We believe that the reported comps were about in line with recently lowered expectations. However, we believe that investors will be disappointed with the lack of visibility and guidance.”

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