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UPDATE: Hollywood Freed Up to Buy More Product

8 Jun, 2001 By: Joan Villa

After months of teetering on the edge of financial collapse, HollywoodEntertainment Corp. has regained its footing and control of its cash flowafter a restructuring of the company’s $255 million debt.

Without the distraction of an onerous payment schedule to drain its cash, Hollywood will now be able to buy more product, pay vendors andstudios, and be more assertive in its role as the nation’s number two rentalretailer, sources say.

One senior executive at a major studio calls the turnaround "a great story," allowing Hollywood "to come back with strength." The studios "all gave them extended terms to keep them alive while they sorted outtheir bank issue," he says. "Lucky for them they’re bricks and mortar, because there’s lots and lots of companies that went through these same difficulties, but their primary vendors and their banks didn’t help themout and they’re no longer around."

The revised agreement with Hollywood’s 19-bank lender group frees the retailer from the burden of a quarterly $37.5 million debt payment.Instead, the 1,800-store chain’s new schedule for this year requires only $1.5 million in the third quarter and $12.5 million in the fourth quarter.

Hollywood has already paid $6 million on March 5 and $1 million on May 5.

In 2002, the quarterly bill will be $20 million, with $40 million due in the fourth quarter, followed in 2003 with $25 million per quarterand a final payment of $66.5 million.

The financial reprieve allows the Portland, Ore.-based chainto buy more new product, particularly fast-growing DVDs, which were understockedin the fall when the chain had to reserve its cash to pay off debt. "This is a cash-driven business; you really need to buy the right product at the right time and have it in stores," notes analyst Jennifer Jordan, of Wells Fargo Van Kasper. "This is definitely a more amenable payment schedule."

The delay in payments has already made a difference in this year’s first quarter. Hollywood’s revenue for the quarter ended March 31 rose7% to $342.2 million, with net income of $3.5 million versus a year-earlierloss. Jordan projects this year’s sales at $1.3 billion versus $1.2 billion last year.

Hollywood’s c.f.o. David Martin says the new schedule allows the chain flexibility. The company plans to invest in DVDs, he adds. But he says Hollywood will keep marketing and advertising costs down, using direct mail rather than TV or radio.

In the loan amendment, the banks impose minimum earnings targets that Hollywood must hit each quarter, which Jordan calls "very conservative." Hollywood must also pay a restructuring fee of $3.8 million. There alsoare restrictions on product purchases and store openings. "Generally, it’sa fairly reasonable agreement," she says, adding Hollywood can’t open newstores but can close or move unprofitable stores.

The chain has been in "no-growth" mode this year, with no new stores planned and 43 locations targeted for possible closure, c.e.o. MarkWattles told analysts last month.

The news of the debt restructuring immediately bolstered Hollywood’s stock price. When Goldman Sachs followed the announcement by raising its rating June 6 to "market outperformer" from "market performer," the stock climbed 23% to $7.40 per share.

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