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UPDATE: Movie Gallery Prefers Hot Games to Cool Movies

17 May, 2002 By: Joan Villa

Facing a “less than optimal” release schedule and competition from the Winter Olympics, Movie Gallery cut back on new release purchasing, eked out a .3 percent increase in same-store sales and boosted revenues 34.5 percent to $123 million in the first quarter versus the year-ago period.

The higher revenues reflect 42 percent growth in the chain's store base to 1,465 locations at the end of the first quarter over last year.

DVD grew to 24 percent of movie rental revenues at quarter's end April 7, up from the 18 percent of revenues the format represented when the chain's 2001 fiscal fourth quarter concluded Jan. 6.

Movie Gallery also expanded game accessories and software “to provide significant copy depth of all game platforms in our stores,” noted chairman and CEO Joe Malugen. “Growth in this industry continues to be driven by increases in the installed base of video game hardware systems,” particularly Microsoft's Xbox and Nintendo's GameCube which were both released in the fourth quarter, he added.

Games currently comprise about 11 percent of revenues but continue to grow in the “mid to high single digits” year over year, according to EVP and CFO J. Steven Roy. “We are going to be reinvesting heavily in the game business in the second and third quarters to take advantage of what we believe will be a very strong summer in the game business.”

However, recognizing the lack of high box-office movie titles during the first quarter, the chain pared back buying by two percentage points of revenue, primarily on VHS format titles, Roy explained. “We didn't think we could rent some of the things that were out there so we didn't buy it,” he noted. “We just lowered our overall purchases in Q1.”

Movie Gallery also reported higher-than-average operational expenses related to travel and training to convert point-of-sale systems at all 324 newly acquired Video Update stores, forcing a one-day closure at each location. The conversion process “typically dampened revenues for two to four weeks,” Malugen said.

Net income for the quarter climbed 145.7 percent to $9.9 million, while pro forma earnings per diluted share rose 66.7 percent to 35 cents from 21 cents in the year-ago quarter. Results include accounting changes affecting goodwill and other intangible assets. If the changes had been implemented last year, the company would have had slightly higher pro forma earnings of 24 cents per share in the year-ago quarter.

“We expected the first quarter to be a difficult quarter due to a less than optimal release schedule of titles from the Hollywood studios and competition for consumers' entertainment time related to the Winter Olympics for three weekends during the quarter,” he added. “In spite of these challenges the company did achieve slightly positive same-store sales of .3 percent.”

Movie Gallery filed a registration statement to sell 8.25 million shares of stock, Malugen noted. The chain intends to use the proceeds to repay debt, acquire stores, open new locations and to provide additional working capital, he explained.

The company also set its annual shareholder meeting for June 13 to elect directors and to increase the authorized shares of common stock from 35 million to 65 million. Typically such approval precedes announcement of a stock split. The chain currently has 27,485,088 shares outstanding.

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