Movie Gallery Posts 35% Drop in Profit

Movie Gallery Inc. on Friday reported a 35% drop in fiscal fourth-quarter profit and forecast earnings for the current year below Wall Street’s consensus, but shares in the company jumped 9.9% as it expressed confidence in its plan to take over Hollywood Entertainment Corp.

The No. 3 movie rental chain in the U.S. said an accounting change for leases and equity losses hurt profit in the quarter ended Jan. 2.

Earnings fell to $11.4 million, or 36 cents a share, from $17.5 million, or 52 cents, a year earlier.

Excluding one-time items, profit was 50 cents a share, matching analysts’ expectations, reported by Reuters Estimates.

Movie Gallery’s revenue rose 6.6% to $208.4 million, driven by a 16% increase in the average number of stores operating, which offset an overall 6% decrease in same-store sales.

For the full year, it projected earnings of $1.78 to $1.88 a share, including about 6 cents a share in expenses related to accounting for leases. Analysts had forecast $1.93 on average.

Movie Gallery, which is working to finalize its friendly takeover of Hollywood, the No. 2 movie rental chain, said it expected the Federal Trade Commission to obtain an injunction preventing Blockbuster Inc., the industry leader, from proceeding with a hostile bid for Hollywood.

Shares of Movie Gallery rose $2.86, hitting a record high $26, before closing at $25.45, up $2.31, on Nasdaq.

Sources close to the case said Wednesday that the FTC’s staff was expected to recommend within days that the agency file suit to block the Blockbuster deal because of concerns it would hobble competition in the video rental market.

“We believe that the Federal Trade Commission and the federal courts will permanently enjoin Blockbuster from buying Hollywood Video. We don’t believe that anyone else has the synergy potential that we have for this acquisition,” Chief Executive Joe Malugen told analysts on a conference call.

“We are not going to raise our bid. We have looked at the Hollywood business and made our best and final offer.”

Movie Gallery has offered $13.25 a share for Hollywood. Blockbuster has offered $14.50.

Hollywood has said Blockbuster’s offer raises “significant antitrust issues that cause substantial uncertainty as to whether the transaction is allowed to proceed.”

However, sources close to the case say lawyers for Blockbuster have argued the deal would not hurt competition because the rental chains compete with Wal-Mart Stores Inc. and others that sell discounted videos.