Movie Gallery's bonds and bank debt traded up on the company's announcement it is partnering with a real estate firm to restructure leases at more than 1,100 video rental stores. Its 11% '12 bonds climbed four points to 48 5/8, while its term loan "B" was up a point to trade in the 90-91 range.
The beleaguered video rental store has hired Hilco Real Estate to restructure its real estate leases. Movie Gallery leases 4,800 video rental stores in the U.S. at a cost of $500 million annually, according to Evan Mann, an analyst at Gimme Credit. Hilco helps businesses improve leverage and cash flow by repositioning and restructuring their real estate. A Movie Gallery spokesman said the move is aimed at improving the company's bottom line. He added the company has not projected how much cost savings it could achieve from the restructuring. This is the second step Movie Gallery has taken to lower its real estate costs. In March, the company partnered with Excess Space Retail Services, a provider of lease restructuring services, to sublease retail space at more than 2,200 of its stores, a move the company projected could save it $100-$150 million over the next three years.
Despite the move to cut costs, Mann said he does not see much upside for the company's bonds unless it can deliver on its plans to cut costs. He added that it will probably take the company 12-18 months to renegotiate leases at lower rates and that the company could have cash flow problems before it manages to lower its real estate costs.
In March, Movie Gallery reported a $552.7 million net loss for 2005, compared with a $49.5 million net profit in 2004. Its same-store revenues declined 8.6% from the fourth quarter of 2004, mostly because of the decline in the home video rental industry. In the same month, Movie Gallery amended its senior credit facility to relax covenants it was not in compliance with. In a separate release, it said it was in compliance with the financial covenants in its senior credit facility for the period ending April 2, 2006. It plans to announce first quarter results on or before May 12.