After disappointing Q1, Movie Gallery looks to future
After releasing paltry first quarter numbers that widely missed analysts’ expectations, Movie Gallery, Inc. (Nasdaq: MOVI) put on a happy face and laid out future plans Friday morning in its conference call.
Citing bad weather, stiff competition, weak movie releases and the shift in daylight savings time, CEO Joe Malugen acknowledged the feeble results but maintained he is “encouraged by developments” in the company’s video game efforts and digital offerings.
This morning before opening, the Dothan, Alabama-based company reported a net loss of $14.7 million, or $0.47 a share, for the first quarter ending April 1, compared with a profit of $40.3 million, or $1.27 a share, a year earlier. First quarter revenues were $647.7 million, down 6.7% from $694.4 million in 2006.
Analysts polled by First Call/Thomson Financial expected earnings per share of $0.53 on revenues of $660.5 million.
Shares of Movie Gallery, which holds the second-largest portion of the North American video rental market, were about 6% lower in mid-session trading, at $3.32. In the last 52 weeks, the stock’s has traded as high as $8.35 and low as $1.85.
Movie Gallery’s upcoming plans include a strong emphasis on Internet technology and high-definition content, Malugen said. Through its MovieBeam set-top boxes, Movie Gallery plans to offer high-definition, streaming movies-on-demand available on a personal computer or a television, he said. A summer test phase will occur in four markets followed by a wide rollout in the fall.
The movie and video-game rental chain, which first went public in 1994, is also developing a sophisticated online customer recommendation engine, akin to NetFlix’s model, Malugen told analysts on the conference call. To distinguish itself from the stiff industry competition of NetFlix and Blockbuster, Movie Gallery will allow users to purchase rentals on a one-time basis without a subscription, he said. Movie Gallery will also allow customers to watch streaming versions of movies or to purchase downloadable copies.
“We will allow consumers to receive and watch movies through mail, store, TV or through Internet,” Malugen said. “We will provide customers with ability to control when and where they watch movies.”
On the conference call, Malugen expressed strong aversion for a movie studio video-on-demand service, which he claimed would “cannibalize DVD sales.” He noted that 20% of purchased DVDs are never watched, but the profits are still realized by the studios. With Movie Gallery’s increased liquidity due to recent refinancing, Malugen said the company is in a better position to negotiate issues like video-on-demand and a shrinking rental-only release time with vendors and movie studios.
Movie Gallery, whose 4,575 stores trail the more than 8,000 locations of Blockbuster Inc. (NYSE: BBI), operates under the Movie Gallery, Hollywood Video, Game Crazy and MovieBeam brands. Analysts roundly criticized the company for purchasing Hollywood Video for $1.2 billion in 2005 shortly before the video rental market began to stagnate. The debt acquired in the Hollywood Video purchase has weighed on profits, and recent refinancing efforts have been met with negative press.
Movie Gallery also announced in the conference call:
• Expansion of retail kiosks, with 200 new units planned for supermarkets and other outlets.
• The recent Goldman refinancing has increased Movie Gallery’s liquidity from $50 million to $100 million.
• The addition of 500 new in-store Game Crazy outlets.
• The decline in the average price of previously-viewed DVDs by $1 over the last year is partly to blame for Movie Gallery’s underperformance. Malugen said the decline is due to price pressures from mass merchants such as WalMart.
• The company has no plans to issue any additional shares of common or preferred stock, but has plans to increase the number of authorized shares.
• The appointment of a new president of retail operations, Jeff Stubbs.
• The retirement of Movie Gallery’s chief operation officer. Efforts to fill the position are ongoing.
