Novice Investing - Horror Story At Movie Gallery

Date: Friday 29th 2008f August 2008 09:15:16 PM

Horror Story At Movie Gallery - 08/16/2006

By: Novice Investing Staff

Movie Gallery (MOVI) late last week revealed that it will file its quarterly report late after posting a second quarter loss of 47 cents per share. This is in contrast with the situation two months ago when people thought that it would get acquired. We have said back then that there was no potential suitor for Movie Gallery and that it has a very high debt load.

When creditors look at Movie Gallery, would they extend the loan if Movie Gallery is posting losses after losses? Probably not. As we speak, shares of Movie Gallery has plunged to $ 2.00 in concerns of bankruptcy. This is a 60% haircut from where it was trading two months ago. In 2005, Movie Gallery acquired Holywood Entertainment for $ 1.2 Billion in cash and debt. At this moment, Movie Gallery is valued at a mere $ 70 Million! Talk about wasting shareholders' money.

Latest balance sheet shows that there is $ 775 Million of long term debt coming due within one year. That is bad omen. With decreasing same store sales and mounting losses, there is no way it could repay its debt that is coming due. Further, with bleak future on the horizon, it is more likely that Movie Gallery's creditors will not extend/refinance this debt. The next likely step for Movie Gallery is to go into bankruptcy protection court.

Why all the gloom and doom? Several reasons lead to that. First, Movie Gallery is in a declining industry where the biggest player (Blockbuster Inc.) seem to struggle to make any money. With video downloads getting more popular (think: youtube), even Netflix needs to watch its back. That does not leave any place for Movie Gallery, isn't it?

Second, do you think Movie Gallery can produce free cash flow with declining same store sales ? In the second quarter, it reported second quarter loss of 47 cents per share. Under this circumstances, will lender extend their loan to Movie Gallery? Lenders will probably think of a way to get their loan back by selling Movie Gallery's assets. That is what banks do.

Third, management was banking on strong second half for business improvement. At the same moment, it blamed current movie droughts of hits for their performance on the second quarter. Second half might be or might not be as strong as management thought. One thing is for certain however. Movie Gallery will probably not see any improvement in business until after the third quarter. The reason is that during the summer month, watching DVD at home is not a preferable way of spending the summer, not to most people anyway. Thus, until fall begins, do not expect Movie Gallery to be able to report any profit soon.

Lastly, with its recent announcement of quarterly filing delay, would regulators and Movie Gallery's suppliers be wary ? Suppliers will be less willing to lend a working capital for Movie Gallery now. They might want to demand upfront payment for anything they supply to Movie Gallery. When you are in such a high debt load, you need your suppliers to provide the working capital for you. When they don't, you are on your way towards bankruptcy. And frankly, that chance is getting higher now at Movie Gallery.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Movie Gallery Inc. (HD) or any other securities.

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