WASHINGTON — Movie Gallery on Friday posted a $12.2 million loss in the second quarter, sparking further alarm over the soft video-rental market.
Company’s stock fell sharply on the earnings news. Although the nation’s No. 2 rental chain had warned investors of lagging financials, the second-quarter loss was wider than Wall Street had expected.
Movie Gallery said it was hit by a weak slate of movie rental releases and charges associated with buying Hollywood Entertainment.
Earlier last week, market leader Blockbuster also reported disappointing earnings. On Friday, Blockbuster saw its stock fall when its debt rating was cut by Moody’s Investors Service.
Movie Gallery chair-CEO Joe Malugen said there’s nothing wrong with the rental biz that better movies wouldn’t solve.
“In this business, our results are driven largely by the quality and quantity of movie titles, which continue to be weaker than we would like,” he said. “However, we believe this is temporary and expect rental demand to rebound in the fourth quarter.”
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Charges from acquisition
Movie Gallery said much of the $12.2 million loss was associated with its acquisition of Hollywood.
Excluding those charges, net income for the second quarter was $4.3 million, compared to $10.6 million the a year ago. The year-earlier results do not include the 2,100 Hollywood stores Movie Gallery acquired in April of this year.
Overall same-store revenue fell 5.5% in the last quarter, including a 8.4% drop in rental revenue.
Same-store rentals were off almost 9% in the company’s Movie Gallery locations and just over 8% in Hollywood stores.
Fewer new stores
Addressing the slump in rental revs, Movie Gallery said it is slashing the number of new stores it plans to open this year from 500 to 300.
“We’ve increased our focus on short-term cost-cutting and we’ve increased our local marketing to pick up some market share,” Malugen said.
One bright spot is product sales, which grew 10.6% on a same-store basis in the second quarter, driven primarily by new videogame hardware and software sales in Hollywood’s Game Crazy departments.
Unlike Blockbuster execs, officials at Movie Gallery said they see no reason to radically change course to try to restore growth.
“As high a respect as I have for our friends at Blockbuster, I disagree with their assessment of where the business is headed and I disagree with their marketing strategy,” Malugen told analysts during the earnings call.
“They may choose to operate their primary businesses, in-store and online rentals, as loss leaders, but I don’t believe that’s the way you build long-term value,” he said.
One new initiative Movie Gallery is pursuing is a test of ATM-style DVD vending machines.
Malugen dismissed suggestions that the company needs to make a move into online rentals to compete with Blockbuster and Netflix; he also called Blockbuster’s decision to eliminate late fees a mistake.
Of Blockbuster’s claim that total rental transactions in its stores have risen 10% since it dropped late fees, Malugen said, “We ran a test in a few markets with $1 rentals and our transactions went up 70%. Our active customer base increased 24%. All it proved is that if you give your product away, your transactions will go up.”
Malugen added that Movie Gallery and Hollywood store managers are opposed to dropping late fees as long as they believe they’re picking up market share from disgruntled Blockbuster customers.
“People are keeping movies out a little longer (at Blockbuster), and that has created some availability problems for them,” Malugen said.
As for moving into online rentals, Malugen said the prices established by Blockbuster and Netflix make it impossible to operate an online service profitably.
Movie Gallery shares closed down $1.09 at $20.27 in trading Friday, a loss of 5.1%. Blockbuster shares closed down 11¢, or 1.61%, at $6.71.