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Movie Gallery to open online rental service

LOS ANGELES (Reuters) - Movie Gallery Inc., the No. 2 U.S. movie rental chain, on Monday said it plans to open an online DVD rental service later this year because it has been losing customers to Netflix Inc. and Blockbuster Inc.’s online service.

The Internet homepage of Movie Galley Inc. as seen on March 19, 2007. The No. 2 U.S. movie rental chain on Monday said it plans to open an online DVD rental service later this year because it has been losing customers to Netflix and Blockbuster online service. REUTERS/moviegallery.com

The company, whose fourth-quarter and fiscal-year results missed Wall Street expectations on Friday, said its Hollywood Video and Movie Gallery stores have been hard-hit by competition from online rivals.

Chief Financial Officer Thomas Johnson said the company learned from a survey that about 10 percent of Hollywood Video customers and about 2 percent of Movie Gallery customers were renting new releases from its stores, but finding older films through the online DVD rental services.

Movie Gallery plans to make a low-cost version of online rentals available to existing customers and “will not spend outrageous amounts of money” to promote the service or to acquire subscribers, Chairman and Chief Executive Joe Malugen told analysts on a conference call.

Movie Gallery on Friday reported a net loss of 47 cents per share, compared with a loss of $17.25 per share a year earlier. Results fell far short of the 15 cents-per-share net profit analysts were expecting, according to Reuters Estimates.

Johnson did not provide a forecast for the current quarter, but said results would be “softer” than last year’s net profit of $1.27 per share. Analysts, on average, were expecting a profit of 23 cents per share in the current quarter.

Johnson also said the company planned on fewer store closures and openings this year than in 2006.

One analyst said the company needed to speed up cost cutting to balance its losses against Blockbuster and Netflix.

“If (the current quarter) comes in at a loss, I would be very concerned about this business,” Wedbush Morgan analyst Michael Pachter said.

The Dothan, Alabama, company has been struggling since 2005, when it took on heavy debt to purchase the Hollywood Video chain and was hit a short time later by an industry-wide downturn in rental revenue.

After a yearlong respite from some provisions of its debt agreement, the company said in January that it likely would not be in compliance in the current quarter unless it renegotiated those agreements for a third time.

At the end of fiscal 2006, Movie Gallery had $1.1 billion in debt and $33 million in cash. It recently refinanced its senior secured credit facility to save more than $6 million of interest payments annually.

The company also announced last week that it had purchased MovieBeam, a video-on-demand service that was spun off from the Walt Disney Co last year.

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