Those hoping for a Hollywood ending for Hollywood Entertainment (NASDAQ:HLYW) aren't going to get it. Shares of the No. 2 video rental chain got dropkicked over 10% to near its 52-week lows after the company warned - again - that fourth quarter, and thus full-year, earnings would come up short.
Last month, Hollywood announced that fourth-quarter earnings would fall short because of movie rental weakness. At the time, it also expected same-store sales to rise between 7% and 9%, rather than 11%. In spite of same-store sales actually climbimg 12% in the fourth quarter, the company now expects earnings to be even lower at $0.36 per share for the fourth quarter, and $1.40 for the year.
But here's the key: Rentals were weak. While same-store merchandise revenue - sales of movies and video games - were up 14%, same-store rental revenue fell 2%.
So what's the deal with rentals? Is it competition from No. 1 Blockbuster Entertainment (NYSE:BBI) or Wal-Mart (NYSE:WMT)? Is Netflix (NASDAQ:NFLX) starting to cause trouble? It's hard to say this early in the game, but you might recall that Blockbuster's own stock took a hit on light rental revenues in its last earnings report as well.
Near $12.60 per share, Hollywood trades at a measly nine times 2003 earnings of $1.40 per share. That's a nice 13% climb from the $1.24 per share the company earned in 2002. But does that make Hollywood cheap?
Don't count on it. With competition coming from multiple directions, it is becoming increasingly difficult to assess the strength of Hollywood's competitive positioning. That said, a Fool's preference is to find companies with clear, sustainable competitive advantages. And unless you see them in Hollywood Entertainment, you'd probably be better off looking elsewhere for value.
Assess Hollywood's value on the Hollywood Entertainment discussion board - only at Fool.com.
Jeff Hwang can be reached at [email protected].
