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Movie Gallery closes 520 stores to leverage operations


DOTHAN, Ala. —The struggling Movie Gallery chain is closing 520 stores across the country this fall to pay down debt and alleviate its financial burdens. The closings will reduce the 4,500-store chain’s base by about 12%, leaving it with fewer stores and an uncertain future in a changing rental industry.

“Closing these stores was a difficult, but necessary, decision to help protect the future of this company,” said Movie Gallery ceo Joe Malugen. “These stores are being closed after evaluating a number of factors, including store profits and the terms of the leases at each location.”

The nation’s second-largest video rental chain said closing the under-performing stores would help pay off some of its approximately $1 billion in debt. There was no mention of how many jobs would be lost at Movie Gallery, but the layoffs are likely to top 4,000, since it currently employs more than 40,000 people company-wide.

Malugen conceded the stores were a drag on overall sales and said, “This action will allow us to focus on the 4,000 stores that have a stronger operating performance and prospects for future growth.” In its most recent quarter ended July 1, the chain posted a loss of $310 million and a 12.2% decline in rental revenue. Malugen didn’t discuss plans for 2008, but the chain is likely to close more stores as it works to avoid bankruptcy,

The closings reflect the problems faced by Movie Gallery, specifically—the company has struggled since its 2005 purchase of the larger Hollywood Video—and the rental business in general. Industry leader Blockbuster has been gradually downsizing for two years as online rentals, delivery on-demand and DVD kiosks have changed the industry and whittled away at traditional in-store rentals. According to Adams Media Research, DVD rentals dipped slightly to $8.54 billion in 2006, and are expected to drop again this year.

Online rental pioneer Netflix now has 6.7 million subscribers and has taken some of the most avid in-store renters away from Movie Gallery and Blockbuster. But Blockbuster has countered with its own Total Access plan, which allows customers to rent DVDs online and return them to stores, and has built a subscriber base of 3.6 million in less than two years.

Even DVD kiosks, which had been a novelty in the industry for nearly two decades, are now a major force. Red Box set up its first kiosks in 2002 and now has more than 5,000 kiosks in 46 states in grocery stores and McDonald’s restaurants. It also has established a Web site that allows customers to rent online and return DVDs at any kiosk.

Unlike Blockbuster, Movie Gallery has not been able to counter these new challenges. It announced plans earlier this year to establish its own online rental program, but has been unable to launch it due in large part to lack of financing.

Even Blockbuster is having trouble, despite changes it has made. In late September, it announced plans to lay off 140 employees at its corporate headquarters and posted a loss of $35 million in its most recent quarter.

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