Movie Gallery (MOVI) hits consensus; blames same-store sales decline on the calendar, the box-office and the weather

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Includes: BBI, MVGRQ
by: David Strahlberg

Movie Gallery (ticker: MOVI) reported results on March 18, 2005 for
the fourth quarter and year end 2004.

 

Results 4Q04 vs. 4Q03:

  • Adjusted EPS: $0.50 vs. $0.53 (-6%)
  • Consensus EPS was $0.50
  • Revenue: $208.4M vs. $195.5M (+7%)
  • Gross profit: $140.8M vs. $128.3M (+10%)
  • Gross margin: 67.6% vs. 65.6% (+200bps)
  • Operating Income: $19.8M vs. $29.4M (-33%)
  • Operating margin: 9.5% vs. 15% (-550bps)
  • Adjusted EBITDA: $28.9M vs. $32.7M (-12%)
  • Adjusted EBITDA margin: 13.9% vs. 16.7% (-280bps)
  • Net Income: $11.4M vs. $17.5M (-35%)
  • Net margin: 5.5% vs. 9% (-350bps)
  • Cash: $25.5M vs. $30M (-15%)
  • Debt: $0M vs. $0M
  • Free cash flow: $43.4M vs. $31.7M (+37%)
  • Store count: 2,482 vs. 2,158 (+15%)
  • Same store sales growth: -6% vs. +6%

Revenue breakdown 4Q04 vs. 4Q03:

  • Rental: $191.1 vs. $173.5 (+10%)
  • Product sales: $17.3 vs. $22 (-21%)

 

1Q05 Guidance

  • Revenues: $228M - $233M
  • EPS: $0.56 - $0.60; consensus was at $0.57
  • Same store sales growth: 0.5% - 1.5%

2005 Guidance

  • Revenues: $875M - $900M
  • EPS: $1.78 - $1.88 (including $0.06 of accelerated depreciation); consensus was at $1.95
  • Same store sales growth: 0% - 3%
  • Capex: $25M

Update on VHQ acquisition

  • Announced definitive merger agreement on March 3, 2005
  • Announced formal takeover bid on March 11, 2005
  • Offer will be open until April 18, 2005
  • Deal is expected to be cash flow positive and EPS accretive in its first year
  • Will add 61 stores in Canada
  • Will try to leverage VHQ's online subscription business, but only in Canada

Update on Hollywood Entertainment (ticker: HLYW) acquisition

  • Announced definitive merger agreement on January 10, 2005
  • Received FTC approval, conditioned upon approval from HLYW shareholders
  • HLYW rejected Blockbuster's (ticker: BBI) unsolicited bid
  • The FTC has sued BBI for non-compliance with its request for information
  • Have no plans to raise bid; view the competing BBI offer as "purely fictional"

Quick comments:

  • Q4 results included a $0.12 per share charge related to accounting for leasehold improvements; it will not affect cash flows
  • Plan to open 400 stores in 2005 (not including planned HLYW and VHQ acquisitions) at a cost of $52M
  • Repurchased $50M of stock during 2004
  • Decline in same store sales growth was the result of (1) Christmas and New Year's Day falling on the weekend; (2) fewer box office hits ($100M+) being released; (3) a 21% decrease in product sales
    revenue due to a reduction in new release movie inventory for sell-through;
    and (4) warm/dry weather
  • DVD rentals comprised 85% of revenues in 4Q04 vs. 65% in 4Q03

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