Movie Gallery Bankruptcy, Take Two: End of the Road for Video Rental?

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On Tuesday, Movie Gallery (MVGR) filed for bankruptcy for the second time in less than 3 years. The Oregon-based chain, America's second-largest video and game rental company, cited increased competition and a reduced number of blockbuster video game releases as reasons for its current problems.And those problems are massive: Between 2008 and 2009, Movie Gallery's revenues fell by 30% to $1.4 billion, while its fourth-quarter operating loss increased by 52%. By late October 2009, the company was behind on its rent at many locations and had set up a hotline for its landlords to inquire about delinquent payments. At the same time, the company announced plans to close 200 stores.

Closing stores is also part of Movie Gallery's current bankruptcy blueprint: It plans to shutter 805 poorly performing outlets this year, reducing its overall total to 1,610 stores, or two-thirds of its current number. At the apex of its growth curve, the chain operated more than 4,500 stores.

That was in 2005.

At the time, the future looked bright for Movie Gallery. It had just finished a massive buyout of its larger competitor, Hollywood Video, which had made it America's second-largest chain. Unfortunately, it made that aggressive move just as Netflix, Redbox, and other competitors were beginning to gnaw out the bottom of the video rental market. By 2007, before it had really digested its Hollywood purchase, Movie Gallery was in bankruptcy court for the first time. In May 2008, it emerged from bankruptcy protection with 3,300 stores and Sopris Capital Associates LLC as its primary equity holder. There's no word yet on how the latest bankruptcy will affect Sopris.

What is clear, however, is that the video rental market, at least in its current form, is on the way out. Blockbuster (BBI), America's top rental chain, has been facing ever-decreasing revenues and is in the process of closing 1,000 stores. Movie Gallery, which spent the 1980s and 1990s buying chains and opening stores, has spent the last three years closing them. In the process, it has demonstrated the dangers of being on the business end of a changing technology. Barnes and Noble (BKS) and Borders (BGP) might want to take note: It's no fun selling typewriters in a digital world.

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