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Movie Gallery plans move into online rentals

UPDATE: CEO Malugen bullish about movie downloads through MovieBeam

By Cindy Spielvogel -- Video Business, 3/19/2007

MARCH 19 | Movie Gallery plans to join Blockbuster and Netflix in the online rental business this year, the company revealed during its conference call with analysts about fourth-quarter results.

Chairman and CEO Joe Malugen downplayed the news, saying the new service would be a “Friends and Family” program and would not involve “outrageous advertising” or large costs to acquire customers.

Malugen has been skeptical about the online rental business in the past. On the call, he was far more bullish about his company’s future in digital downloads through its recently announced acquisition of MovieBeam.

Malugen said the MovieBeam system, in which movies are delivered wirelessly to a set-top box, is preferable to services offered by competitors that involve downloading to a PC or to a PC and then a TV, methods he described as “cumbersome.”

Malugen said the MovieBeam acquisition will build on the company’s earlier acquisition of iBlast, a competitor to MovieBeam.

Bricks-and-mortar ‘foundation’

Malugen also said Movie Gallery will expand its kiosk business this year but was short on details, as he was for the online rental service.

The company currently operates 74 kiosk units under the Hollywood Video brand in supermarkets, malls and other high-traffic areas, and the rollout calls for an additional 200 units this year.

He stressed that bricks-and-mortar stores will continue to be the “foundation” of the company’s business, with the other areas “ancillary byproducts.”

Malugen said rental stores will be important in the growth of the new high-definition disc formats, particularly because of the discs’ high price points. He said Movie Gallery began carrying some HD DVD and Blu-ray Disc product in 2006 and that he believes high-def will replace standard DVD in the same way DVD began to replace VHS in the late ’90s.

Asked further about the online service, executive VP and chief financial officer Thomas Johnson said it would be implemented primarily as a means of retaining existing customers rather than attracting new ones.

Catalog renting online

Johnson said the company surveyed its most active customers who were also using Blockbuster or Netflix for online rentals and found that less than 2% of the Movie Gallery-branded store customers were using them and were using them primarily for older movies, while slightly less than 10% of Hollywood Video-branded store customers were doing so.

Johnson said that could help explain why catalog rentals were down 18% for the year at Hollywood outlets, which was “more pronounced” in the fourth quarter, when Blockbuster implemented its Total Access online/in-store rental program.

Johnson said Movie Gallery’s “Friends and Family” service would allow customers to get older titles through the mail from Movie Gallery rather than having to go to a competitor.

But the company indicated no interest in following Blockbuster in eliminating in-store late fees because that leads to limited product availability. Late fees account for less than 10% of Movie Gallery’s revenue, Johnson said.

Financial concerns alleviated

Johnson said his company’s fourth-quarter same-store comparisons also were negatively impacted by tighter credit terms from suppliers, which limited the company’s cash flow and resulted in the need to “make some tough buying decisions.”

However, with the company’s recently announced refinancing, both Johnson and Malugen said they believe concerns over Movie Gallery’s financial condition have been alleviated.

Movie Gallery’s fourth-quarter and full-year 2006 results revealed a net loss of $15.1 million for the quarter, an improvement from a net loss of $546.5 million for the previous year’s fourth quarter. Net loss for the year narrowed to $25.7 million from a net loss of $552.7 million the preceding year.

Total revenue for the fourth quarter was $663.3 million, down 1.9% from $676.4 million in the fourth quarter of 2005, on a 2.3% smaller store base this year, Johnson said.

Same-store revenue for the year was down 3.7%, relatively flat at negative 0.1% at Movie Gallery locations and down 5.4% at Hollywood stores.

Movie Gallery had released some results earlier, including total revenue for the year of $2.54 billion, up 25% from $1.99 billion the preceding year, which included 36 weeks of ownership of Hollywood Entertainment, and a same-store sales decline in the fourth quarter of 2.9%.

Movie Gallery opened 123 new stores during 2006, most of which had already been in the pipeline before the company began implementing a store count and size reduction strategy. It closed 230 stores during the year, for a net reduction of 107.

Johnson said that although the company doesn’t plan to open many new stores in the next year, it doesn’t plan to close as many, either. Movie Gallery numbers about 4,600 stores in the U.S. and Canada. Its nine stores in Mexico are being eliminated.

Movie Gallery included a charge of $3 million in the fourth-quarter results to account for store closings and an additional $1.5 million to close its operations in Mexico.

Community projects

In related news, Movie Gallery has begun its fourth annual Be a Star fundraiser for the Helen Keller Foundation, which benefits efforts to end blindness and deafness through medical research.

Through April 8, Movie Gallery customers who make a donation will get a star that looks like the stars on the Hollywood Walk of Fame.

The chain has collected more than $2 million for the Foundation over the last three years.

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