Movie gallery dvd rental

Entertainment Editors/Business Editors

DOTHAN, Ala.--(BUSINESS WIRE)--Jan. 21, 2003

Movie Gallery Provides Initial Outlook for 2003

Movie Gallery, Inc. (NASDAQ:MOVI) reported today that same-store revenues for the fourth quarter ended January 5, 2003, a 13-week quarter, rose 6.2%, within the Company's previously announced guidance of mid to high single-digits. The Company increased its earlier guidance for fourth-quarter adjusted earnings to $0.37 to $0.40 per share from its previously announced expectations of $0.35 to $0.38 per share. Adjusted earnings per share exclude non-cash stock compensation expense and the impact of the accounting change discussed below. Additionally, the Company expects fourth-quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, non-cash stock option compensation, and non-recurring items, less purchases of rental inventory, exclusive of new store opening inventory) to total between $22.5 million and $24.5 million. The Company announced that it expects to report fourth-quarter and full-year 2002 earnings on Wednesday, February 19, 2003.

Due to the continued migration of consumers to the DVD format, the Company has begun to reduce its inventory of catalog VHS units and, during the first quarter of 2003, will make a one-time investment of approximately $7 million in popular catalog DVD titles to satisfy increasing consumer demand for movies on the DVD format. As a result of changing consumer demand patterns, the Company's remerchandising initiatives, the expected continued consumer transition to DVD, and the continued evolution of the game rental business, the Company will adopt a change in the useful lives and salvage values for certain products as of the beginning of the fourth quarter of 2002. Salvage value on VHS movies and games will be reduced to $2 and $5 per unit, respectively. The amortization period for rental inventory will be reduced as follows: non-base stock, or new release, inventory from a maximum of 36 months to 6 months; base stock, or catalog, inventory from 36 months to 24 months; and games from 18 months to 12 months. Amortization expense for movie rental inventory will continue to be recognized on an accelerated basis, which is intended to match as closely as practicable the amortization expense with the consumption of the rental inventory.

As a result of these changes, the Company will record a non-cash charge of approximately $34 million, $28 million of which will be recorded in the fourth quarter of 2002, and the remaining $6.0 million over the course of 2003 as follows: 1st Quarter - $2.7 million; 2nd Quarter - $1.4 million, 3rd Quarter - $1.1 million; and 4th Quarter - $0.8 million. The 2003 charge, which will not recur in fiscal 2004, represents amortization expense in excess of that which would have been recognized had the new policy been applied retroactively for all previous periods. Going forward, the Company expects annual amortization expense to continue to approximate annual recurring rental inventory purchases.

Commenting on the announcement, Joe Malugen, the Company's Chairman and Chief Executive Officer said, "We are pleased with the fourth-quarter same-store revenue results and are particularly satisfied with the strong same-store revenue results achieved during the last two weeks of the year. In fact, our busiest day of the year, New Year's Eve, produced the largest rental revenues on a per store basis in Company history, giving us confidence in the consumers' overall satisfaction with the rental experience despite the overwhelming marketing push for the consumer to purchase movies during the holiday period. We are also very pleased with our full year results, whereby revenues, adjusted earnings per share and adjusted EBITDA all exceeded our initial expectations by significant amounts. In the last 14 months, our store base has grown from just under 1,100 stores to nearly 1,800 units, an outstanding achievement on the part of our associates in the United States and Canada.

"We are also pleased to announce a change in our amortization estimates for rental inventory, the timing of which reflects the more gradual shift to DVD in our more rural core marketplace than is the case with our peers. We believe we have established a policy that is comparable to our largest competitor, but that also reflects the unique issues of the smaller markets in which we operate. With an inventory net book value per store of less than $50,000, we believe our policy is very conservative given the rental revenues produced in a year by that inventory. During the first quarter, we are making a $7 million investment in older, high demand DVD catalog product to enhance the presentation of DVD within our stores. The purchase of this inventory is expected to have an approximate $0.05 negative impact on adjusted earnings per share during 2003. However, we believe this inventory will give our customers a low-cost alternative to watching those movies versus purchasing them, thereby assisting our top line as well during the year and into the years that follow.

"As we look toward 2003 and into 2004, we continue to be excited about Movie Gallery's growth opportunities. For 2003, we have increased our expected new store openings to between 175 and 200 stores and continue to evaluate on-strategy, accretive acquisitions of single store operators and small chains. We are also pleased by the continued progress of the former Video Update stores, particularly the Canadian operations, which generated in excess of a 20% same-store revenue improvement in the fourth quarter. The former Video Update stores, which rolled into our same-store revenue base the last three weeks of the fourth quarter, will be included in same-store revenue results for the full year 2003. Although rental revenue will continue to see some pressure from DVD sell-through, we believe the value proposition of the rental experience will continue to drive new DVD customers to the stores. We will continue to work throughout the year to make the rental experience easier for the customer, reinforcing the value in the rental visit."

The Company today also announced its guidance for 2003, a 52-week year ending January 4, 2004. Revenues are expected to grow from approximately $529 million in 2002 to between $635 and $655 million in 2003, as a result of an anticipated same-store revenue increase of between 2% and 5% and the Company's new store-opening program. Adjusted earnings per share (earnings before stock compensation expense and the 2003 impact of the accounting change discussed above) are expected to be between $1.34 and $1.44 per share. This range reflects the amortization impact of the catalog DVD purchase discussed above, which totals approximately $0.05 per share. Adjusted EBITDA, excluding the one-time, $7 million DVD catalog investment, is expected to range between $95 million and $100 million. Although Movie Gallery continues to evaluate additional acquisitions, this guidance does not include any impact from potential acquisitions in 2003. Overall, Movie Gallery continues to target long-term annual growth in adjusted earnings per diluted share in a range of 15% to 18%. Finally, the Company expects to generate an estimated $60 million to $65 million of free cash flow, before new store openings, acquisitions, share repurchases or other investments.

Movie Gallery will hold a conference call to discuss this release today at 3:00 p.m. Eastern time. Investors will have the opportunity to listen to the conference call over the Internet by going to www.moviegallery.com and clicking Investor Relations or by going to the following web sites - www.streetevents.com or www.companyboardroom.com - at least 15 minutes early to register, download, and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will be available at these sites shortly after the call through the end of business on January 28, 2003.