UPDATE 4-Movie Gallery files bankruptcy, to shut 805 stores

Wed Feb 3, 2010 12:58pm EST

* Hollywood Video operator files Chapter 11

* Plans to close 805 stores, cut thousands of jobs

* Canadian affiliate not part of filing

* Company had filed bankruptcy in 2007

(Adds details from company announcements)

By Jonathan Stempel

NEW YORK, Feb 3 (Reuters) - Movie Gallery Inc MVGR.PK, operator of the Hollywood Video rental chain, filed for bankruptcy for the second time in three years after sales fell and losses mounted, and said it would close 805 U.S. stores.

The closings affect one-third of the company's 2,415 U.S. stores, court filings show. Several thousand of its roughly 19,100 employees will probably lose their jobs.

Video retailers such as Movie Gallery and Blockbuster Inc BBI.N have suffered as people switch to alternatives like Google Inc's (GOOG.O) YouTube, Netflix Inc's (NFLX.O) mail-order service and kiosk operators such as Coinstar Inc's CSTR.O Redbox.

Last month, Blockbuster lowered its earnings forecast after a disappointing holiday sales season. [ID:nN21221995]

Movie Gallery and four affiliates filed for protection on Tuesday with the U.S. bankruptcy court in the Eastern District of Virginia. Its Movie Gallery Canada Inc affiliate was not part of the filing. The company operates 184 stores in Canada.

According to its website, Movie Gallery will liquidate about 760 stores immediately, and keep about 900 stores that generate positive cash flow. It said the status of remaining stores is "not yet clear" and that more closings are expected.

"Absent the filing of these Chapter 11 cases and the corresponding ability to exit a substantial number of underperforming stores and further deleverage its capital structure, the company likely would not be able to continue as a going concern," Chief Restructuring Officer Steve Moore said in a court filing.

Movie Gallery also operates stores under the Movie Gallery and Game Crazy brands. It said "it is impossible to predict" how long the bankruptcy reorganization will take.

The company previously filed for bankruptcy in October 2007. It emerged the following May with private equity firm Sopris Capital Associates LLC and affiliates as its majority equity owner, a regulatory filing shows.

Movie Gallery hired Gordon Brothers Group to liquidate its stores. The company, Sopris and Gordon Brothers did not return requests for comment.

REVENUE FALLS, LOSSES MOUNT

Moore said Movie Gallery's video rental business has been hurt by increased competition, while its videogame business has suffered from falling sales of Nintendo's Wii console and games, and a dearth of high-profile videogame title launches.

Revenue fell to $1.4 billion in 2009 from $2 billion in 2008, and its fourth-quarter operating loss increased more than 52 percent to $129.3 million from $84.8 million, Moore said.

Movie Gallery owes more than $540 million in principal to its first- and second-lien lenders, it said. By October 2009, it was delinquent on many obligations and faced possible looming defaults under loan covenants, it also said.

Founded in Dothan, Alabama in 1985, Movie Gallery once operated nearly 4,800 stores, following its 2005 purchase of Hollywood Entertainment Corp.

Movie Gallery shares last traded on Jan. 29 at 7.9 cents on the Pink Sheets, Reuters data show.

The case is In re Movie Gallery Inc, U.S. Bankruptcy Court, Eastern District of Virginia, No. 10-30696. (Reporting by Jonathan Stempel; Additional reporting by Chelsea Emery in New York; Tom Hals in Wilmington, Delaware, Sue Zeidler in Los Angeles, and Santosh Nadgir in Bangalore. Editing by Lisa Von Ahn and Robert MacMillan)