Novice Investing - Watching Movie Gallery Closely

Date: Monday 01st 2008f December 2008 04:56:12 PM

Watching Movie Gallery Closely - 04/16/2007

By: Novice Investing Staff

It is almost 10 months after our original article on Movie Gallery Inc. (MOVI). At the time, $ 775 Million of Movie's long term debt is due within one year. Looking at MOVI's operations, it made more sense for lender to not extend the maturity of this long term debt. Lo and behold, Movie Gallery was actually able to refinance its long term debt and there will be no significant debt coming due in the coming years. That can mean two things. One, lender has a lot of faith in Movie Gallery's business model. Or two, lender has too much money to lose and it is financially make much more sense for them to collect interest while extending the loan to Movie Gallery, perhaps much higher than the prevailing interest rate.

That doesn't mean Movie Gallery is out of the wood. While share price has risen from its $ 2 per share range to $ 4.14 per share currently (hey, it is a double!), Movie Gallery is still bleeding badly. For the fiscal year ending on December 2006, Movie Gallery was posting loss of $ 25.7 Million. While that don't sound much, please be aware that Movie Gallery only had $ 32.9 Million cash on hand while interest expense is running at $ 120.4 Million per year.

Thus, with one bad quarter, Movie Gallery will run out of cash. Due to its highly leveraged deal to buy Holywood Entertainment, Movie Gallery has no financial flexibility to expand its business. It is therefore quite a surprise when Movie Gallery was finally launching its online movie service. While it is cheaper than brick and mortar business, launching a new service will strain Movie Gallery's financial further.

How about profits? If you look at the past seven years, Movie Gallery was posting a profit of $ 1.65 per share at a maximum. This is when the word Netflix is a joke and online rental is unheard of. Now, if you assume that everything is OK and Movie Gallery can somehow regain its glory, that $ 1.65 per share is equal to $ 52.5 Million in net profit per year. It takes 20 full years for Movie Gallery to erase its $ 1.09 Billion of long term debt. That is a long wait indeed.

Perhaps, Movie Gallery was thinking that it can deliver growth through a combination of online and brick & mortar offering. If Movie Gallery can bring revenue growth from online, then $ 1.65 per share of annual profit is reachable. Even then, you still need 20 years of good profits to erase all of that debt. At this point, Movie Gallery has no bullets left. It is either do or die. What do you think?

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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 Vonage Holdings Corp. (VG) or any other securities.

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