Movie Gallery's (Nasdaq: MOVI) first-quarter plot was downright scary. You can get the Foolish lowdown on all the relevant stats right here. I'll go over some highlights -- or should that be lowlights?
Let's begin with the first act: Sales decreased almost 7%, and the company recorded a net loss, versus a net profit in the year-ago period. Act II, which we'll call "Fall of the Margins," is a disappointing sequence indeed. Gross, operating, and net margins all saw significant declines. Act III offered some redemption, since the retailer produced some free cash this time around; last year, it utilized cash for operations.
The bricks-and-mortar DVD-rental business is getting squeezed from every direction. Both Movie Gallery and Blockbuster (NYSE: BBI) have felt the sting of disruption from Netflix (Nasdaq: NFLX) and the video-on-demand technologies provided by cable companies such as Comcast (Nasdaq: CMCSA). You can also throw in the RedBox DVD vending machine, a joint venture between McDonald's and Coinstar.
Blockbuster has attempted to add value for shareholders by battling Netflix on its online home turf, which Movie Gallery will attempt at some point as well. Movie Gallery has also flirted with the MovieBeam experiment, in addition to RedBox-type devices of its own.
I'm not sure whether something like MovieBeam will do much, if anything, for the company, but I do wholeheartedly support management's desire to expand its exploration of the video game business, which is currently cycling upward. Increasing the penetration of its Game Crazy brand would be smart indeed, since next-generation technologies from Sony (NYSE: SNE), Microsoft (Nasdaq: MSFT), and Nintendo are heating up software sales. Although it'll be a long while before Game Crazy poses any kind of threat to GameStop (NYSE: GME), the premiere icon in this slice of retailing, this business is nevertheless worth some increased capital investment.
But are management's video game ambitions enough to make me ignore the bad quarterly numbers? Nope. Although I don't think that brick-and-mortar DVD stores will entirely vanish anytime soon, I'm simply not enamored by the business, and I've got severe reservations for its growth prospects. I'll keep an open mind, but Movie Gallery's management will have to present some compelling new strategies to get me interested.
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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 6,127 out of 28,755 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool's disclosure policy never charges late fees.
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