Movie Gallery, Inc.

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Movie Gallery, Inc.

739 West Main Street
Dothan, Alabama 36301
U.S.A.
Telephone: (717) 677-2108
Fax: (717) 794-4688
Web site: http://www.moviegallery.com

Public Company
Incorporated: 1985
Employees: 7,000
Sales: $267.6 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: MOVI
NAIC: 53223 Video Tape and Disc Rental

Movie Gallery, Inc., is the nation’s third-largest video store operator. The Dothan, Alabama-based company owns over 900 video stores and franchises about 90 more. Movie Gallery stores are located mainly in small towns in rural areas—areas too small to attract video store giants Blockbuster and Hollywood Entertainment. Movie Gallery stores are stocked with 3,000 to 10,000 films and 150 to 750 Sony, SEGA, and Nintendo video games. The company’s stores also sell blank cassettes, VCR cleaning equipment, movie memorabilia, and snacks. Some stores sell DVDs (digital video discs). The company operates video stores in 29 states, mainly in the Southeast and Midwest. Movie Gallery also sells merchandise such as new and used video films, video games, and gift items via its web site, www.moviegallery.com. Cofounder, Chairman, and CEO Joseph T. Malugan owns 20 percent of the company; cofounder and President H. Harrison Parrish also owns 20 percent.

A Risky Endeavor in 1985

When Joseph T. Malugan and H. Harrison Parrish decided to go into the video rental business in the mid-1980s, many people thought they were making a big mistake. At that time, the video industry was new, and no one was sure whether people would eventually tire of renting movies. “In the early years, there was not a lot of confidence in the video business,” Malugan, a tax attorney-turned-investor, explained in the Knight-Ridder/Tribune Business News. “There was some fear it would be a fad.”

However, Malugen and Harrison believed video rentals were an inexpensive form of entertainment that was here to stay. They sub-franchised a small Orlando video store chain that was having financial problems. The two friends began operating video specialty stores in Alabama and the Florida panhandle through their subsidiary M.G.A. Inc. (Movie Gallery of Alabama).

The first Movie Gallery stores were successful and the video industry as a whole was thriving. Malugen and Harrison rapidly expanded the company, buying out small “mom-and-pop” stores in rural areas. By June 1987, Movie Gallery owned five stores and franchised 45 more. The following year the company began to consolidate the franchises into company-owned stores. In 1992 Malugan and Harrison acquired the rights to the company’s name—Movie Gallery. By 1994 Movie Gallery had 73 stores with sales over $12 million. To raise money and pay off debt, Movie Gallery went public in 1994. The company sold three million shares at $14 each to raise approximately $35 million.

Trouble in the Mid-1990s

The mid-1990s was a tough time for video store operators. Customers became frustrated when they were unable to rent popular new releases because video stores had only a few copies. Many were turning to pay-per-view channels and watching HBO and Cinemax instead of renting videos. The Summer Olympics in 1996 and delays in Nintendo’s new N64 platform hurt video store sales further. At the same time, Movie Gallery was also experiencing difficulties of its own. It had recently acquired the New England-based Home Vision Entertainment Inc. for $32 million in stock. However, slumping sales that year made purchasing the 55-store chain difficult. After the acquisition, the company struggled to convert its many new stores into Movie Gallery formats. Industry experts feared Movie Gallery had grown too big too fast—in just two-and-a-half years, the company had expanded its portfolio from 97 stores to a staggering 863 stores. New point-of-sale equipment added to the company’s expenses. In July 1996 former shareholders from Home Vision a complaint against Movie Gallery in the United States District Court for the District of Maine citing breach of contract. They sued for more than $7 million in damages.

Reorganization in the Late 1990s

After much deliberation, Movie Gallery executives decided to halt the company’s expansion and concentrate on internal operations—a decision that proved to be wise. Movie Gallery passed up a chance to buy the struggling Moo vies Inc. video chain. The company closed 50 stores and laid off 15 percent of its staff. In just a few years, it reduced its debt from $80 million to $42 million.

In an effort to boost sales, Movie Gallery decentralized its operations. It allowed regional managers to make decisions regarding the design and management of individual stores, so the stores would be more carefully targeted toward the local customer base. It added large magazine racks to most of its stores and began selling snacks such as pizza. The company increased the its copy-depth, the number of copies of videos per store, through revenue-sharing plans with movie studios. The company also upgraded some its stores, adding new signs and fixtures, and greatly expanded its selection of videos that were for sale. The company diversified its selections of for-sale videos to include classics and children’s products as well as new releases. The company hoped this new selection would increase customer traffic and stimulate rental sales. Around the same time, Movie Gallery stores became some of the first to offer DVDs. The company began selling DVDs in 25 of its stores in the Dallas and Virginia areas.

In 1997 Movie Gallery announced a joint venture with Hollywood Partners, Inc., in which it would feature in-store promotions for the movie The Lost World: Jurassic Park. The partnership was part of an aggressive campaign in which Lost World products would be sold in Movie Gallery stores. Included in the promotion was popcorn packaged in bold, brightly colored T-Rex collector tins decorated with the Lost World logo.

The company also made some managerial changes in 1997. Malugan and Harrison hired Robert Sirkis as chief operating officer. Sirkis was the former chief executive officer at Boston Chicken (Boston Markets) and a former vice-president at Pizza Hut. Before hiring Sirkis, Harrison had served as chief operating officer for Movie Gallery. Also in 1997, former Home Vision executive Will Guerrette joined the company as senior vice-president of sales and marketing.

With its internal operations on sound footing and new management to handle the company’s day-to-day operations, Malugan and Harrison felt it was time to refocus their efforts on expanding the company. While the Home Vision purchase had been difficult, it had opened new markets for Movie Gallery. Before the purchase, the company had acquired stores mainly in the Southeast. However, with the Home Vision purchase, it had branched out into New England. While Movie Gallery intended to continue buying out stores in rural areas away from markets dominated by Blockbuster and Hollywood, the company felt it was time to expand into other areas of the country. “We think we’re well-positioned to expand across the United States, now, which is different from our previous view,” Malugan said in Video Store. Industry experts agreed that Movie Gallery was well established and ready to expand. Its conservative approach during difficult times had spared it the serious financial problems some of its competitors faced. Furthermore, because its stores were much smaller than video superstores such as Blockbuster, the company’s overhead was lower, enabling it to secure substantial credit for expansion. In March 1998 the company received more good news: a judge ruled in favor of Movie Gallery and against Home Vision Entertainment Inc.

Back on Track in 1999

By 1999, Movie Gallery was back on the buying track—it had 900 stores and planned to continue acquiring new ones. The company signed 75 new leases and planned to open 30 to 35 more stores. Using some of the proceeds from its initial public offering, Movie Gallery invested over $1 million in launching an e-commerce site, www.moviegallery.com. The company believed the site would offer its rural customers products not available in its stores, and it also hoped the site would allow it to tap into a new, urban market. To set themselves apart from competitors, Movie Gallery offered a wide variety of merchandise on its web site. Customers could purchase previously viewed movies at discounted rates as well as items like Pokémon videos and Sega games, which were in great demand.

“You have to realize that many of our customers have no Blockbuster, Barnes and Noble, or even a Wal-Mart within miles of their homes,” Will Guerrette, Movie Gallery senior vice-president of sales and marketing explained in Video Store. “That gives us a unique position to offer them more than videos, DVDs, and music.” Movie Gallery planned to eventually offer telecommunication products and services via its Web site.

Key Dates:

1985:: Cofounders Joseph T. Malugan and H. Harrison Parrish sub-franchise a small Orlando video chain.
1988:: Movie Gallery begins to consolidate its franchises into company-owned stores.
1992:: The company acquires the rights to the Movie Gallery name.
1994:: Movie Gallery goes public.
1996:: The company purchases Home Vision video chain.
1997:: Robert Sirkis is hired as chief operating officer and Will Guerrette as senior vice-president of sales and marketing.
1999:: The company launches an e-commerce site and purchases 88 stores from BlowOut Entertainment, Inc.

A Blowout in 1999

In May 1999, Movie Gallery acquired 88 stores from BlowOut Entertainment Inc., which had filed for Chapter 11 protection in March. BlowOut had video rental outlets located mainly in Wal-Mart stores and Kmart superstores. Movie Gallery paid $2.4 million for BlowOut’s stores, which had generated $18 million in sales. While some in the industry considered the move risky, Malugen felt Movie Gallery was in a position to make the stores thrive. He explained in Supermarket News that the buyout “represents a substantial growth opportunity for Movie Gallery with limited risk. As the only major video specialty store operator that focuses primarily on operating in small-town markets, we have developed a significant expertise in managing stores that are relatively small by industry standards.” Movie Gallery invested $250,000 in the BlowOut stores to boost their inventories. The company also hired a design consultant to give the stores a new look.

In April 1999 Movie Gallery signed a deal with Trans World Entertainment chains to test FastTake video kiosks in its stores to give customers background information on thousands of videos. In September of the same year, the company repurchased about eight percent or 13.4 million outstanding shares of its stock in an effort to protect the company and its stock price.

With the industry trending toward consolidation and facing strong competition from pay-per-view channels, the video rental business is tougher than ever. In the first quarter of 1999, Movie Gallery posted a net income of $1.8 million and was utilizing its positive cash flow to reduce its debt. While the company lacked the high sales of giants Blockbuster and Hollywood Entertainment, it felt its niche as a “rural video rental specialist” would be secure for many years to come.