I can understand why Movie Gallery
Based on the premise that an institutional investor sold just a third of its holdings, the plunge was overdone, and the press release was the right move for Movie Gallery. Parroting back its November guidance -- which calls for comps at the store level to decline between 5% and 9%, and not far worse -- is fine.
My problem is that Movie Gallery chose to wax optimistically about a future that, in reality, is only likely to get bleaker.
"Looking forward to 2006, with the continued softness in the rental industry, we will soon resume discussions with our lenders regarding further amendments to Movie Gallery's senior credit facility," CEO Joe Malugen was quoted in this morning's release.
That's fair. The softness is evident in the financials, and even Blockbuster
"We continue to believe that our industry is long-term fundamentally sound, and we are looking forward to the introduction of next-generation, high-definition DVDs as a significant catalyst for our business."
What? Can anyone reasonably assume that the video store rental business is "long-term fundamentally sound," or that Blu-ray and HD-DVD will turn Movie Gallery around? I don't think so.
For starters, with companies like Netflix
The argument in favor of Movie Gallery is that it will be the last major player to feel this hit. Its flagship chain has focused on rural markets, where the fat pipes and willing audiences necessary to make it happen are less far along than in more metropolitan areas. This may have changed after the city slicker Hollywood Video chain was acquired by Movie Gallery last year, but the argument still carries some weight. However, I imagine that this is also the same demographic group that will be the last to adopt the new high-definition DVD technologies.
Another concern is whether the smaller Movie Gallery stores are equipped with the rack space to handle the same title on three different formats. Netflix already threw its support behind the new platforms, but I don't see new formats as being a savior to the rental chains.
HD-DVD will be great for the movie studios, since they are able to sell duplicate versions of older titles on the higher-end format. Consumer electronics chains like Best Buy
Sorry, Movie Gallery. You lost me at "looking forward."
Tomorrow, I'll be back to explore the ramifications of Blockbuster's latest policy of including free, weekly in-store rentals to its online subscribers.
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Longtime Fool contributor Rick Munarriz lives in South Florida, the original stomping grounds for Blockbuster. He also owns shares in Netflix and has been renting online since 2002.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.