Hollywood Entertainment's (Nasdaq: HLYW) continuing saga, well, continues. After repeated earnings warnings over the last couple months, the video and video game concern reported fourth-quarter earnings Thursday after the bell, with net profits down a whopping 84% as last year's earnings were positively impacted by a tax benefit.
Fourth-quarter earnings were $23 million, or $0.36 per share, compared to $142 million, or $2.21 per share, in the same quarter last year. While last year's tax benefit mitigated the downturn in profits, rentals are still anemic, and the company said that its 2004 earnings may only match those of 2003.
Both Hollywood Video and Blockbuster (Nasdaq: BBI) have been snubbed by movie watchers lately, with Motley Fool Stock Advisor pick Netflix (Nasdaq: NFLX) counted as a major competitive force.
With video rentals down, the bright spot in Hollywood Entertainment's operations is Game Crazy, which had strong same-store sales. However, ongoing rollout of the concept continues to be a drag on earnings, costing more than anticipated to open. In the company's conference call (transcript courtesy of CCBN StreetEvents), Chairman, CEO, and President Mark Wattles said Game Crazy should be profitable in 2006.
But entertainment is everywhere. While 80% of Hollywood Video stores face archrival Blockbuster (not to mention that you could practically be in the Arctic with a Net connection and a P.O. box and still use Netflix), Wattles said that all of its Game Crazy stores compete with an extremely formidable pack of retailers, which include heavyweights like Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY), Toys "R" Us (NYSE: TOY), Target (NYSE: TGT), and Electronics Boutique (Nasdaq: ELBO).
Hollywood Entertainment hinted of strategic changes throughout the coming year. An in-store video subscription service could be in the works as soon as the third quarter. It's also kicking around the idea of -- you guessed it -- an online subscription service. The company warned that such initiatives would, of course, cost money to implement and create a drag on earnings to provide long-term gains later.
Judging by the stock's jump on Friday, it seems many investors see Hollywood Entertainment's stock price as a bargain and a possible growth story. But with the far-reaching and adept competition at hand, it seems excited investors might want to press the pause button, at least for now.
Is Hollywood Entertainment done for? Should the company compete head to head with Netflix, or would that move be a flop? Discuss the issues with other Fools on the Hollywood Entertainment discussion board.
Alyce Lomax does not own shares in any of the companies mentioned. She welcomes your feedback via e-mail.
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