You've got to love a happy ending. When video rental giant Blockbuster(NYSE: BBI) missed third-quarter projections yesterday, it was only natural to expect rival Hollywood Entertainment(Nasdaq: HLYW) to follow suit this morning. Sectors have a way of huddling together through thick and thin, so the unexpected weakness at the country's largest chain should have trickled down to No. 2.

But with a fortunate twist of Frank Capra proportions, Hollywood nailed its September-quarter numbers today and raised the ante for the quarters that lie ahead. The company saw its earnings grow from $0.17 a share to $0.26 a stub for the quarter on revenue of $369 million.

The video rental industry has been booming, even as the recession lingers. With money tight and consumers wary of traveling, a night at home with the entertainment system has proven a welcome option. So, the 1,800 Hollywood video stores were a popular destination last quarter, with same-store sales climbing 7%. The company thinks the floor will collect even more wear and tear in the fourth quarter, as it sees comps climbing by 10% and growing even further and faster come next year.

But it's not only the brisk business propping up the industry's fundamentals. The transition to DVD formatting has given chains higher margins on a medium that takes up less shelf space than the bulky VHS tapes. Concept expansion has also helped, as Hollywood Entertainment continues to add video game offerings to its stores.

In keeping with the happy Hollywood ending, the company also upped its guidance. It now expects to earn about $1.20 a share this year and between $1.40 and $1.45 per share in fiscal 2003. That's enough to put a smile on any face, whether the economy fades to black or not.