Gallery to sublease store space

UPDATE: Chain hopes move will fix cash crunch, boost store traffic

By Cindy Spielvogel -- Video Business, 3/15/2006

MARCH 15 | As it continues to face cash-flow problems, Movie Gallery announced Wednesday it will pursue subleasing opportunities for more than 2,200 of its 4,800 Movie Gallery and Hollywood Video stores. Movie Gallery shares rose more than 32% in morning trading to $2.87 on the news.

Movie Gallery said it has entered a management agreement and alliance with Excess Space Retail Services to sublease about 2,500 square feet per location. Movie Gallery stores currently average 6,000 square feet, more than is normally required in today’s rental environment.

A Movie Gallery spokesman said it’s too early to say what the subleasing businesses will be because they are still in the process of being identified. The shared space plan is a new one for the rental chain, the spokesman said.

Excess Space is normally in the business of lease restructuring or selling entire stores. The company’s other clients include major retailers such as Borders, McDonald’s and Walgreens.

“In addition to the incremental revenue we expect to realize through subleasing portions of the stores, we look forward to the additional traffic that our retail partners will generate,” Movie Gallery executive VP and chief development officer Keith Cousins said in a statement.

Challenges in the bricks-and-mortar rental business also hit Blockbuster again as the retailer confirmed it will close its 86 stores in Spain after a “sizeable decline in rental revenue” due to piracy and other concerns, a Blockbuster spokesman said.

Following several days of negative news concerning its financial health, Movie Gallery was expected to soon announce an agreement on the renegotiation of its debt.

Analysts said they expected Movie Gallery was on the verge of successfully renegotiating its loan agreements, noting similar strategies have long been used by rival Blockbuster. “They’re getting the banks involved,” said Dennis McAlpine, principal at McAlpine Associates, dismissing scuttlebutt that a bankruptcy could be imminent.

Moody’s Investor Service downgraded Movie Gallery’s debt rating Friday after the retailer’s stock price fell more than 20% last Wednesday and further on Thursday following reports of a possible bankruptcy (VB, 3-8).

Blockbuster last week announced higher profit on lower revenue for the fourth quarter (VB, 3-9). Movie Gallery will announce its fourth-quarter results before month’s end.