Jul 5, 2007

Movie Gallery Parent Of Hollywood Video Will Be Adding Pink Slips To Their Shelves

New article: Movie Gallery & Hollywood Video Gets Extension.

On July 2 Movie Gallery, which has 4,600 Movie Gallery, Hollywood Video & Game Crazy stores, issued a Press Release concerning their inability to meet all their credit terms. From the Press Release:

“The Company does not intend to comment further publicly with respect to its evaluation process of strategic and restructuring alternatives until its conclusion.”
Since the company is not going to openly discuss their restructuring plans, we’ll have to speculate.

Nowhere on Movie Gallery’s web site do they list how many employees they have, but I’ll estimate that a minimum of 100,000 jobs are at stake here.

From a
Birmingham Business Journal article by Cindy Crawford:

“Dothan's Movie Gallery Inc. saw stock shares plummet 65 percent Tuesday after reporting it could not meet financial obligations of a loan - and the company announced plans of a possible sale.”

“After markets closed Monday, the movie rental chain notified its lender, Goldman Sachs Credit Partners LP, that it could not meet covenants because of a "softer than expected" second quarter.”

It would appear that the company is in worse shape than their letting on, the restructuring of their senior debt only happened last February, and after one “softer than expected” quarter they are unable to meet their payments.

Joe Malugen, Chairman and CEO, presented this
Company Overview and Executive Summary (pdf) at the annual meeting just four weeks ago.

I see four possible futures for this company, from the best to the worst.

1. Merge or be bought out. This would result in quite a few closures but the remaining stores would be stronger. But with the prospects for the video rental industry continually looking worse, would anyone really want more retail outlets.
2. Close 30% to 50% of their units and hope to reemerge with a stronger base and then work at developing a reasonable online presence. The problem with that is there is a current price war in the online rental sector and if they want to jump into that sector, they will need deep pockets. Which we know they don’t have.
3. File for reorganization and close 50% to 75% of their stores and try to tough-it-out as a much smaller but stronger company. Again, the problem is that it takes a lot of money to close stores and they will need their creditors to take on the chin and then put up additional funds.
4. Fire sale. Get what they can for maybe 20% of their stores, file for bankruptcy and let their suppliers and employees take a substantial share of the loss. This should be what the creditors are pushing for, spread the pain around and reduce their negative exposure.

None of these scenarios are good for the employees. Tens of thousands will be laid off with little or no severance packages and no placement services. If there is a sudden and undisclosed closure of stores, paychecks could be at risk while attorneys let the courts work out the payroll situation. This is not as uncommon as it sounds.

Pass on any info you might have either in the comment section or by E-mail through my profile.

good article about Movie Gallery is by David Lieberman, in USA TODAY.