After three straight extensions to its credit terms, Movie Gallery (NASDAQ:MOVI) has finally decided to do something material about its flagging finances. The nation's No. 2 movie-rental chain (after Blockbuster (NYSE:BBI)) is grabbing a BB gun, ready to decimate its headcount and sell off some inventory.

Some 520 stores among the 4,500 or so Movie Gallery and Hollywood Video locations have big bull's-eyes on their back walls. Management now hopes to turn a profit from the remaining core of roughly 4,000 stores. Somehow. Someday.

That's not easy, given the rise of online video rentals from the Blockbuster/Netflix (NASDAQ:NFLX) duopoly. Meanwhile, the next wave in this sea change is waiting around the corner. Hello, direct downloads and real-time streaming video.

While I wish the best for Movie Gallery's employees and investors, Fools have seen this move coming for quite a while. It's been five quarters since Movie Gallery last turned a quarterly profit, and its last annual profit came in 2005. The company has lost $376 million over the last 12 months -- the $309.9 million loss in the previous quarter alone erased the combined $310 million in net earnings the company amassed from 1993 to 2005.

Movie Gallery is a sad shell of a business operation, with a $19.6 million market cap but $1.2 billion in enterprise value. Its debt load is crushing, and I doubt that a rather meek 11% reduction in stores and headcount can fix what ails these guys. Perhaps management should reload that gun and do another round in the shooting gallery soon.

Further Foolishness:

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Fool contributor Anders Bylund is a Netflix shareholder and subscriber who holds no other position in any of the companies discussed here. He did make some money shorting Movie Gallery the summer of 2004, though. You can check out Anders' holdings if you like, and Foolish disclosure belongs on the New Releases shelf anytime, no matter how long we've had it.