Looking for a big Wall Street winner this morning? Check out Movie Gallery (NASDAQ:MOVI). Shares of the movie rental chain opened 59% higher today after the company posted better-than-expected March quarter results.
Revenue shot up 197% to hit $694.4 million in the period. Earnings per share rose to $1.27 from a $0.58 showing a year earlier. The production left analysts dumbfounded, since they were expecting the retailer to earn just $0.15 a share on $644 million in revenue.
Wow. That's like walking into an Adam Sandler flick and being shown some vintage Spielberg instead. Analysts, who were expecting the company to earn only $0.02 a share for all of 2006, must be feeling pretty thunderstruck at the moment. Even Blockbuster (NYSE:BBI) opened higher in sympathy, though one good report isn't enough to save a fading industry.
All that Movie Gallery's report shows us is that swallowing the larger Hollywood Video chain last year has paid off in the near term. The last time investors rallied around Movie Gallery, it was set on subleasing many of its stores, a sharp money-making move coating a partial surrender. This morning's report points to a more potent financial pop in its flagship rental business, but let's be cautious in uncorking the pent-up euphoria. That kind of bubbly doesn't get any better with age, and Movie Gallery isn't any closer to licking its malaise.
Comps for the quarter fell 6.5%, a bleak continuance of a troublesome trend in the industry. Movie Gallery partly blamed the store-level weakness on a soft video release slate. That contrasts with the improvement at other flick renters like mail-order titan Netflix (NASDAQ:NFLX) and video-on-demand providers like Comcast (NASDAQ:CMCSA).
Cash-flow cynics may also point out how, despite the generous profit, the company benefited from a lack of income tax expense, and that the net cash provided by operating activities was actually negative during the quarter. The company is reining back expansion in an attempt to keep its future capital expenditures in check. That's a mixed solution for obvious reasons.
Long-term investors are riding high today, but the company's balance sheet now sports $1.1 billion in debt after the acquisition of Hollywood Entertainment. Though that leverage paid off this quarter, it will be tricky to overcome the roughly $27.5 million in quarterly interest expense that the company faces if comps keep slip-sliding away.
Sure, applaud the company for its market-thumping performance today. But if it doesn't reverse its sagging store-level popularity, I'm worried about the sequel quarters to come.
Netflix is an active recommendation in the Motley Fool Stock Advisor newsletter service. Let David and Tom Gardner's blockbuster picks add a little star power to your portfolio with a free 30-day guest pass.
Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
