Movie Gallery Muses Blockbuster

"Everybody has speculated," says Thomas Johnson, senior vice president of corporate finance and business development. "It certainly makes a lot of sense if you were to put the two companies together. I think we would be very receptive to do something of that magnitude, and we're going to do whatever makes the most sense to create the most value for our shareholders."

Movie Gallery closed on its $1.2 billion acquisition of Hollywood early last year, adding 2,000 stores to its portfolio, which now operates 4,800 stores in total. Blockbuster, by contrast, has about 9,000 stores worldwide. Both companies are facing challenges as consumers switch their home entertainment preferences from store-based rentals toward Internet-subscription companies like Netflix and online downloads.

Meanwhile, Movie Gallery is still considering store closures. During its first quarter, which ended April 2, the company closed 46 stores that in duplicate locations as a result of the Hollywood acquisition. However, the company still plans to open 140 new stores this year.

Overall, Movie Gallery had a stronger quarter than it has in recent periods. Though year-over-year same-store sales dropped 6.5%, net income reached $40.3 million, up from the $18.4 million it posted during the same period last year.

Executives also gave updates on leasing efforts within its stores. The company signed a deal earlier this year with Lake Success, NY-based Excess Space Retail Services the sublease space in 2,200 of its 4,800 units. So far management has started negotiations on 1,500 stores with 22 approved deals and 399 letters of intent.

A variety of retailers, restaurants and business-service providers have shown interest, says Joe Malugen, Movie Gallery's chairman, president and chief executive officer. But he stresses that the deals will take time to show up on the company's balance sheet. "This is a store-by-store effort," he says.