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Movie Gallery's Temporary Reprieve

By Rick Munarriz - Updated Nov 15, 2016 at 5:20PM

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The struggling DVD rental chain holds up better than the market expected.

Let's not rush to bury Movie Gallery (NASDAQ:MOVI) just yet.

The DVD-rental specialist surprised Wall Street this morning by holding its own. Even though the company's filing delay will keep us in the dark regarding income-statement line items below the gross profit line, Movie Gallery's top line looks surprisingly healthy.

For the quarter, revenues rose 2% to hit $583 million, confounding analysts' predictions that the top line would dip to $556 million. Same-store sales fell a scant 0.4%, which begs a bit more detail; the company's Hollywood Video chain suffered a 1.9% decline in comps, but its rural namesake stores came through with a welcome 3% advance.

Movie Gallery's showing is also an improvement over the more pronounced 1.4% comps decline that rival Blockbuster (NYSE:BBI) posted earlier this month.

Like Blockbuster, Movie Gallery is optimistic about its slate of upcoming movie releases. The new Wii and PS3 video game consoles rolling out this week should also inspire an uptick in video-rental business, as gamers hesitant to fork over $60 for a new game may choose to rent it first instead.

Movie Gallery has chosen to stick to its knitting in the offline world. Instead of following Blockbuster into what may prove to be a cannibalistic business online, in competition with the faster-growing Netflix (NASDAQ:NFLX), Movie Gallery has focused on absorbing its Hollywood Entertainment acquisition. It has also been using its floor space more effectively, subleasing the room it doesn't necessarily need at many of its stores.

The future isn't likely to brighten further. Leveraged companies will keep smarting if borrowing costs keep climbing. Minimum-wage hikes may hurt. Even those new PS3 and Wii games that Movie Gallery is counting on will cost the company more up front than the older titles. None of this would be a problem if the company had the flexibility to boost its rental rates, but that'll be difficult. Netflix and Blockbuster have been holding their ground on attractively priced mail-order rentals, and now companies like Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are diving into digital delivery.

Shares of Movie Gallery were trading 8% higher this morning, because it managed to hold off the inevitable for another quarter. But all of these challenges will have to be dealt with sooner or later.

For more buzz on the movie rental biz, check out:

Netflix and Amazon.com are active recommendations in the Motley Fool Stock Advisor newsletter service. Discover all of David and Tom Gardner's blockbuster stock picks with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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