What a horrible morning last Thursday! There is nothing worse than when you expect one thing, and get just the opposite. I had expected 2Q results from MOVI that would be significantly better than expectations, but instead the results were significantly worse! Ouch! The stock dropped over 50% on the day.
An analysis of the 2Q results shows some positive and negative news. On the negative side:
1. Same store sales at the Hollywood division were down almost 8%. A shockingly high number.
2. The company loss .48 per share.
3. The company hired a firm to help them with re-structuring.
4. The company’s debt load remains very high, and they will have to re-negotiate their debt ratios in March.
5. The forecast for the 3Q implied more poor results, and probably a big loss.
6. If the studios restrict their credit further, they could start into a downward spiral where they cant bring in enough product to sell, so sales are lower, as is profit, which causes further credit tightening…this is the path to bankruptcy.
On the positive side:
1. The Movie Gallery stores showed a positive comp of 1%. If Hollywood had shown those same comps, the stock would be up several dollars, not down several dollars.
2. Over the last 12 months, the company has added 115 million in value to the business. This can be primarily seen in the reduction in Accounts Payable by 100 million [check the companys balance sheet on the earnings report]. A-EBIDTA is 260 million, and interest expense is about 120 million. This leaves 140 million for Cap-Ex and AP/Debt reduction. (Cap-Ex is 35 million).
3. They have indicated that the studios will support them. Either way, their account payables are down 100 million from one year ago.
4. The 4Q results should be much better. Movie theater attendance was up in the 2Q by 6%, and is up so far in the 3Q. These movies hit DVD in the 4Q.
A big question is why the results on the Hollywood stores was so much different than the Movie Gallery stores?? In the past there has been some differences in the results, but not this large. The only thing I can think of that could be the culprit is that Movie Gallery cut back on the amount of product it brought into the Hollywood stores. This would have been done to ensure that their EBIDTA was as high as possible so that they would meet their credit ratios (which they did, easily). If this is the case, it could be seen as a positive, since it is a correctable situation (assuming that they have the credit available to bring in the product). Note that purchases of product was way down in the quarter as compared to prior quarters.
So, where does the company (and stock price) go from here? There are 2 arguments that can be made, 1 for a bankruptcy and 1 for a huge turnaround. Both scenarios have evidence to back them up, and the proponents of each can make a good case for each. However, investors have to decide which argument will come true for themselves.
The true test will come in the 4Q. Same store sales should definitely be up. MOVI has said all along that things will pick up when better product comes along, and it is arriving in the 4Q (as shown by the increase in movie theater attendance). If same store sales are not up, then there is a fundamental shift away from rental, and the company is in deep trouble.
