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Peanut Gallery at Movie Gallery

By Rick Munarriz – Updated Apr 5, 2017 at 11:22AM

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Movie Gallery starts a new chapter in its life. Unfortunately, that chapter is 11.

Movie Gallery (NASDAQ:MOVI) filed for Chapter 11 bankruptcy protection yesterday, as expected. If you haven't brushed up on the issue, now is the time to figure out who the winners and losers will be.

The filing will likely wipe out the existing common shareholders, but it's not the end of the DVD rental chain itself. The company will make the most of the bankruptcy umbrella to work its way out of unattractive leases at underperforming stores. The immediate plan is to shutter hundreds of stores at the 4,430-unit chain. More may come.

Movie Gallery got a win in bankruptcy court yesterday, granted access to $140 million of its possession financing facility on its first day of Chapter 11 protection. The move wasn't in doubt, but holding back on the greenbacks would have killed the company. If you can't pay vendors for new releases or keep a reasonable payroll coming, you're toast.

The end result will be a Movie Gallery that is smaller and leaner, although it's not a prescription for a store-based platform that continues to fade in popularity. Blockbuster (NYSE:BBI) will pick up some of the retail business, but that's a model at the mercy of former 7-Eleven CEO Jim Keyes' ability to complete a dramatic makeover.

Yes, drastic concept tweaks can still save the industry. Look at the success of a company like Hastings Entertainment (NASDAQ:HAST), which rents DVDs, but is able to offset weakness there through more conventional media and consumer electronics sales. The rub here is that you need space to diversify, and this comes at a time when both Movie Gallery and Blockbuster are scaling back on the square footage of their typical stores. Merging the concept isn't impossible, though. RadioShack (NYSE:RSH) may be in a funk, but it's able to achieve plenty in a much smaller footprint than your typical Movie Gallery or Hollywood Video format.

Creditors should demand change at Movie Gallery. Without a concept makeover, it will re-emerge with a cleaner balance sheet, but the same cash-sucking model that will find it tugging at the Take-a-Number machine at the U.S. Bankruptcy Court in a couple of years.

So what happens if Movie Gallery comes out of this smaller yet smarter? A lot of that depends on the closings. Bowing out of one of its metropolitan Hollywood Video stores is not the same as bowing out of a rural Movie Gallery unit, where it may be the only game in town when it comes to in-store rentals. That would leave locals with little choice but to turn to mail-delivered providers like Netflix (NASDAQ:NFLX) and Blockbuster's Total Access plan.

In broadband-friendly markets, a smaller Movie Gallery would be an alley-oop pass to digital delivery providers like (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Netflix and Blockbuster also have their own digital platforms.

It's important to keep an eye on all of the potential winners. Movie Gallery's shrinking isn't going to shrink the consumers' appetite for celluloid. Get to know the feeders.

Grab your popcorn and catch up on the latest movie rental action: and Netflix have been recommended to Stock Advisor subscribers. Free 30-day trial subscriptions are available if you want to learn more about growth stock investing.  

Longtime Fool contributor Rick Munarriz owns shares in Netflix. He also is an early adopter of the service. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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