Movie Gallery MOVI
December 30, 2002 - 12:07am EST by
2002 2003
Price: 12.26 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 392 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Movie Gallery bills itself as the leading home video specialty retailer in rural and secondary markets. They are the third largest chain over all with 1,772 stores in 43 states and six Canadian provinces, behind Blockbuster with over 8,200 stores world wide, and Hollywood Video with over 1,800 stores world wide.


The home video specialty retail industry is fragmented and undergoing consolidation. There are currently 27,000 domestic stores according to the Video Software Dealers Association. The three largest chains account for 8,600 stores, or 32% of the total, and 49% market share. The economies of scale and access to capital of the larger chains leads to the uncompetitiveness of smaller operators and consolidation.

Adams Media Research states that the home video specialty retail industry grew from 15.3b in revenue in 1996 to 20.6b in 2001, a 6.1% CAGR, and Adams predicts it will grow at a 4.7% CAGR to reach 31.2b in 2010, driven by DVD penetration. Ninety percent of TV households own a VCR or DVD player. At the end of 2001 there were 24.8m DVD homes, and this number is projected to grow to 90.4m by 2010, a 15% CAGR.


In its 2001 annual report Movie Gallery states that it is the lowest cost operator among the national chains. Its strategy of operating in rural and secondary markets means it has lower renting and labor costs than the other chains, and the fact that it only competes with Blockbuster and Hollywood in one third of its markets helps. Over the last four quarters MOVI had a gross margin of 69%, compared to 62% for Hollywood and 59% for Blockbuster. MOVI also had a better return on assets, 10% compared to 2% and 6% for Blockbuster and Hollywood, respectively.

Over the last five years MOVI has seen significant growth:

EPS Revenue Stores
2001 .53 369,131,000 1,415
2000 .37 318,936,000 1,020
1999 .17 276,945,000 963
1998 (.77) 267,633,000 837
1997 .03 260,356,000 856

In fiscal 1998 MOVI took a one time charge to change inventory valuation, without which EPS would have been .15.

Over the last four quarters EPS has grown to 1.11, revenue to 484,249,000, and stores open to 1,772. Analysts are projecting EPS of 1.27 for 2002 and 1.45 for 2003. Despite this growth, MOVI trades at a PE ratio of 11, with no long term debt.


One industry risk is Video On Demand (VOD). Currently, movies are released by the studios to the following distribution channels in the following order: 1. theaters, 2. hotels and airlines, 3. home video retailers, 4. pay per view, 5. others, such as cable TV. Most studios release to home video retailers 30 to 60 days prior to pay per view, because they feel this mix maximizes their profitability. In the Movie Gallery 2001 annual report "industry sources" state that of the 19.7b studio revenue in 2001, 56% came from home video. The Blockbuster 2001 annual report references Paul Kagan Associates who puts those numbers at 20.0b and 46.5% respectively. The Disney and News Corp created a joint venture to offer video on demand 45 to 60 days after the film is released to video stores. If video on demand becomes popular and the movie studios decide moving it up in their release stream provides a better mix, the home video retailers will suffer.


Short term, the company just announced a $25 million share buyback. Long term, the stock price should improve with continuing growth and multiple expansion.
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