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UPDATE: Hollywood Posts Profit, Same-Store Sale Increase

1 Nov, 2001 By: Joan Villa

An optimistic Hollywood Entertainment Corp. reported an 11% hike in same-store sales for the third quarter ended Sept. 30 and boosted projections for full-year earnings and fourth quarter same-store revenues.

Hollywood reported net earnings of $15.4 million, or 28 cents per share, compared to $700,000, or 2 cents a share, in the year-ago quarter, on 13% higher revenues of $345 million. Net income benefited from an operating loss carried over from fiscal year 2000, the company said. Net income adjusted without the added tax benefit would be $9.3 million, or 17 cents per diluted share.

Chairman and c.e.o. Mark Wattles attributes the double-digit same-store increases half to industry growth and half to the company's own internal improvements, including tight operational controls and management changes designed to better support individual locations. However, “we are nowhere near operating our stores at what we have set as an acceptable standard,” he concedes. “We believe we can continue to experience store-level growth rates ahead of the industry as a result of our turnaround.”

Wattles says Hollywood's average 7,000-square-foot stores, slightly larger than Blockbuster's 6,500-square-foot average, still trail Blockbuster's $1 million per-store annual returns.Hollywood's 716 stores open less than three years average $634,000 while the 1,048 locations open longer reach an average $789,000. If the chain can bridge that gap, Wattles adds, “We've got a $150,000 revenue opportunity and that's what we're after.”

“If we can get the execution back to levels we experienced in our past” — prior to 1998 when Hollywood's per-store revenue was the highest in the industry, Wattles says —“We think we can generate much higher revenue per store than what we've done today,” he said.

Industry analyst Robert Alexander with New York-based research firm Alexander & Associates believes Wattles' focus on tightening operational costs has paid off in higher same-store sales and could continue to boost revenues. Hollywood has achieved this quarter's increases because of a positive image among consumers, he says. But going forward the chain will be hard-pressed to overcome the name recognition that Blockbuster has parlayed into higher per-store revenue in the past three years.

“Blockbuster's brand presence is really overwhelming and I'm prepared to bet that two-thirds of that [per store] difference is brand,” Alexander says. “If he's $300,000 behind, the $100,000 from operations he can do, but the $200,000 from brand is a huge hurdle. That's the challenge that he's up against and it's quite formidable.”

In addition to controlling costs and paring advertising from radio and television down to just limited direct marketing, Wattles believes both DVD and new release games can significantly impact future revenue if allocated and purchased correctly. DVD currently represents 20% of Hollywood's revenue while games comprise 8%, down from about 12% in the past, he says.

The company raised its target for fourth quarter same-store sales to 6% to 7%, up from the previous projections of 4% to 5%. Hollywood is now looking for pro forma net income in the range of 26 cents to 28 cents per share for the upcoming quarter, up from the previous target of 24 cents to 26 cents. That raises the fiscal year pro forma net income projections to $1.365 billion to $1.37 billion, or 10 cents per diluted share higher than previous estimates of 45 cents to 49 cents. For the fiscal year 2002, Hollywood boosted per share net income projections to $1.05 to $1.10 per diluted share, based on 3% to 4% same-store sales growth.

No new stores are planned for 2002 because openings are not allowed under the chain's recently renegotiated credit facility until debt is reduced to under $100 million, Wattles said. The company has $248 million in outstanding debt, according to executive v.p. and c.f.o. Jim Marcum.

However, Hollywood is eyeing other products and services for its stores that would complement rather than cannibalize video, Wattles adds, "But those are for 2003 rather than 2002."

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