Weak Rentals Hurt Movie Gallery Results

Movie Gallery Inc. (MOVI) on Friday posted a quarterly loss from unexpectedly weak video rentals and merger-related charges, sending its shares down more than 9 percent.

The No., 2 U.S. video rental store operator, which acquired competitor Hollywood Entertainment (search) on April 27, said it expected weakness in the rental market to continue in the third quarter before hit movies like "Batman Begins" and "Star Wars Episode 3" arrive in the fourth quarter.

The company's comments were similar to those of top competitor Blockbuster Inc.(BBI), which on Tuesday reported a wider-than-expected quarterly loss and abandoned its prior earnings outlook.

"What they are doing is trying to adjust outlook down so that whatever they do is not going to look so bad," Dennis McAlpine, managing director at McAlpine Associates said. "I think they got burned this quarter."

He rates the stock "buy."

Sales at stores open at least a year fell 5.5 percent, worse than the slight decline the company expected, Movie Gallery said.

Movie Gallery's loss for the second quarter ended July 4 was $12.2 million, or 39 cents a share, compared with profit of $10.6 million, or 32 cents a share, a year earlier.

The loss included accounting changes and other items related to acquisitions, as well as 32 cents a share in interest expense related to a new credit agreement to fund the Hollywood Entertainment and smaller acquisitions, the company said.

Excluding those items, profit was 45 cents a share, according to Reuters Estimates. Analysts on average forecast 51 cents a share, although the estimates of the four analysts surveyed ranged from 35 cents to 65 cents, according to Reuters Estimates.

Total revenue rose 166.2 percent to $504.7 million, due to the acquisition.

Movie Gallery and other video rental chains have been hammered as movies that led to a 19-week box office slump earlier this year work their way into video stores.

"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," said Joe Malugen, chairman and chief executive. "However, we believe that this softness is temporary and expect rental demand to rebound in the fourth quarter."

The company said it has cut its store expansion plans to 300 new stores from 500 due to the sluggish rental market.

Separately, the company is also experimenting with video vending machines, which would allow customers to rent videos 24 hours a day.

But the company currently does not plan to start renting videos online, Malugen said in a conference call with analysts, arguing that current monthly subscription rates charged by Blockbuster and Netflix Inc. (NFLX) would not let the business be profitable.

He also said the company has not been hurt by Blockbuster's policy of eliminating late fees, which cut into Blockbuster's revenue in the second quarter.

"We are running a business here and we are in business to be profitable," he said.

Movie Gallery shares were down $1.92 at $19.44 on Nasdaq.