Movie Gallery

Movie Gallery Inc. (Dothan, Ala.) reported a 166 percent increase in total revenues for the second quarter ended July 3, 2005. It was the video rental retailer’s first financial report since its acquisition of Hollywood Entertainment Corp. (Wilsonville, Ore.), which it acquired on April 27, 2005, and includes approximately 10 weeks of Hollywood’s results and 13 weeks of Movie Gallery’s results.

The company reported a net loss for the quarter of $12.2 million, including: a $6.6 million reduction in extended viewing fee revenues related to the purchase accounting effects of conforming Hollywood’s revenue recognition method to Movie Gallery’s method; a $5.9 million charge related to a change in accounting estimate for VHS residual value; one-time cash charges of $2.5 million related to the write-off of merger-related bridge financing fees, $0.9 million for a merger-related transaction bonuses; other charges of $0.2 million related to stock based compensation; and equity losses of $0.3 million related to investments in alternative delivery vehicles for movie content. These items total $16.4 million. Excluding these items, net income in the quarter would have been $4.3 million, or a 59 percent from a year ago.

“During the quarter, we were delighted to complete our acquisitions of both Hollywood Entertainment and VHQ,” said chairman, president and ceo Joe Malugen. “Having said that, we were disappointed to see that our same-store revenues in both the rural and urban markets were adversely impacted by what many experts are now characterizing as the worst box-office slump in more than two decades. Coming into the quarter, we were expecting our same-store revenues to be down slightly. However, with the month of June down considerably more than anticipated, we experienced a 5.5 percent decrease in same-store revenues for the second quarter of 2005.

“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. However, we believe that this softness is temporary and expect rental demand to rebound in the fourth quarter. In the fourth quarter of 2005 some of the year’s biggest titles and likely best sellers, including ‘Batman Begins,’ ‘Star Wars Episode 3,’ ‘War of the Worlds,’ ‘Mr. and Mrs. Smith’ and ‘Fantastic Four,’ will be released. While we expect challenging conditions to persist in the third quarter, we are optimistic that conditions will improve by the end of the year.”