Movie Gallery's CEO upbeat on outlook

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Author: David Lieberman

Section: Money, Pg. 03b

NEW YORK -- After a dreary year for the store-based home video rental business, Movie Gallery made a vigorous case Thursday for investors to keep the faith.

"Fundamentally, we believe that renting a movie is a convenient, affordable and attractively priced form of entertainment," said Movie Gallery CEO Joe Malugen -- echoing themes raised last week by its larger rival Blockbuster.

His message came as the chain reported a fourth-quarter loss of $546.5 million, on revenue of $676.4 million. Results include a $527.9 million write-down on intangibles mostly related to Hollywood Entertainment, bought last year for $862 million, plus assumption of $385 million in debt.

Revenue at stores open at least a year fell 8.6%.

Investors are anxious -- Movie Gallery has plummeted 90% in the last 12 months, to $2.42 -- though some analysts say the market is overreacting.

"The $8 billion (rental) business isn't going to disappear," says independent analyst Dennis McAlpine. "This isn't buggy whip time. Everybody's got a DVD player."

Malugen expects a "modest rebound" in rentals the second half of the year, when potential summer blockbusters including Mission: Impossible III, The Da Vinci Code, Cars and Superman Returns hit stores.

Tom Adams, of Adams Media Research, says he expects "another down year," although the business is beginning to stabilize.

That process could be helped once the studios roll out the new high-definition DVDs. They should sell for $24 or more, Malugen says -- a price that might lead more consumers to rent instead of buy.

Yet, here, too, Adams is cautious, projecting sales of 4 million high-definition DVD players by the end of 2009. That's far short of the 13 million players sold in the current DVD technology's first four years.

Movie Gallery also wants to cut real estate costs, taking Hollywood Video stores to 4,000 square feet from 6,600 and Movie Gallery stores to 3,000 from 4,200. Blockbuster stores are typically 5,000 square feet.

"We've had a great deal of interest" from companies interested in subleases, says Malugen, although he won't identify them.

Much of the space to be given up is now used for VHS tapes, which Movie Gallery is quickly scrapping.

(c) USA TODAY, 2006