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Video chain is attacking costs after a huge loss

Movie Gallery, which acquired Hollywood Video last year, is cutting growth, jobs and store space.

By MARK ALBRIGHT
Published March 24, 2006

The nation's second biggest video chain reported a whopping $546-million fourth-quarter loss on Thursday and unveiled a laundry list of cost-cutting tactics to survive in the fast-changing home entertainment industry.

"It has been a challenging year, but we are disappointed" with the performance, said Joe Malugen, chairman and chief executive officer of Movie Gallery Inc., which continues to suffer indigestion after swallowing equally troubled Hollywood Video last year.

The Dothan, Ala., chain is freezing store growth beyond 140 stores in the pipeline, cutting 300 administrative jobs and will begin shrinking the size of 2,200 Hollywood Video stores by a third. The company will look for other retailers to lease the surplus space that's filled with VHS cartridges. Movie Gallery cut $20-million in annual expenses and last week negotiated relaxed credit terms from lenders that are supposed to provide a year's breathing room for a turnaround.

Like its biggest rival, Blockbuster Inc., Movie Gallery is adjusting to a society in which people are turning to other technologies to entertain themselves during their idle hours.

While analysts cite the growth of rental services such as Netflix as a factor, Malugen can find no evidence to support that.

He blamed weak offerings from Hollywood. But he is confident that will change because the studios are so dependent on healthy video sales and rentals that DVD releases account for far more studio revenues than box office receipts.

The company, which operates 4,800 stores, reported a loss equal to $14.50 a share, but the company's stock held firm at $2.42 a share, down 1 cent.

Thanks to the acquisition, revenues nearly tripled to $520-million, up from $191-million in the year ago quarter. But revenues in stores open more than a year, a sign of retailers' hold on their customers, plunged 9 percent.

Profit margins were eroded largely because video games offered no help. New hardware such as Sony's Portable PlayStation and Microsoft's Xbox 360 carry far slimmer margins than the games they run.

The company is shopping its Game Crazy video game chain for a private equity buyer. The price is so depressed that Game Crazy probably will not be sold this year, said chief financial officer Tim Price.

Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified March 24, 2006, 02:15:43]