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Update: Hollywood Entertainment Rentals Flat, Revises Down

4 Dec, 2003 By: Erik Gruenwedel


Shares of Hollywood Entertainment Corp. took a hit this week after company officials revised downward by 10 percent fourth-quarter same-store sales projections from rentals in its Hollywood Video chain.

In a call to investors, Mark Wattles, founder and CEO of the Portland, Ore.-based rentailer, said he expects same-store sales from rental product for the quarter (ending Dec. 31) to fall between negative 1 percent and positive 1 percent, down from a previously forecasted 3 percent increase. Hollywood had projected a fourth-quarter net income of 47 cents per diluted share, but now expects between 38 cents and 40 cents.

“We had positive rental comps during the first two weeks of the quarter, which then turned negative with the start of the baseball divisional series playoffs and remained negative until the past two weeks,” Wattles said, but added “we are still not back on track.” With less than half of the quarter's revenue opportunity remaining, he said, “it is highly unlikely that we will make up for the rental product revenue shortfall.”

In October, Hollywood projected an 11 percent growth in total same-store sales. The company now expects total same-store sales growth for the quarter of between 7 percent and 9 percent. Hollywood reported that a 9 percent increase in same-store sales from merchandise will most likely be offset by negative results in Game Crazy, which is expected to post a $13 million operating loss in fiscal 2004.

With 550 Game Crazy units and 150 scheduled to open in 2004, retail analyst Stacey Widlitz said Hollywood Video's vulnerability to an uncertain video game market is a problem. “The game business is actually going to lose money next year when it was supposed to be accretive,” Widlitz told Smartmoney.com.

The ongoing sluggish rental market doesn't surprise James McGlynn, manager at the Summit Mutual Fund in Cincinnati. He said the plummeting prices of DVD product and players are turning renters into buyers, and attempts by rentailers to push sellthrough won't work. “Will they want to compete against Wal-Mart?,” said McGlynn. “Yeah, that's fun.”

As analysts began to voice doubts about the rental business, the Video Software Dealers Association last week put out a press release noting that first-half 2003 statistics show rentals up 3.5 percent from last year and equal to 2002 in the second half. “The public is choosing both [renting and buying],” said Bo Andersen, president of the VSDA.

McGlynn agreed video rentailers' days aren't numbered. “There are still a few more years to milk this cow,” he said. “But some investors don't want to have anything to do with something that has crested its growth potential. Viacom [doesn't] want to be in the tail end of the distribution of their product.”

Viacom is reportedly close to selling Blockbuster Inc.

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