FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Hollywood Entertainment  Corporation
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLYW)") else Response.Write("(Nasdaq: HLYW)") end if %>
10300 SW Allen Boulevard
Beaverton, OR  97005
(503) 677-1600

UNION CITY, CA (March 3, 1997)/FOOLWIRE/ --- Hollywood Entertainment reported their fourth quarter and fiscal year end on February 24th. On an annual basis for 1996, they did $302 million in sales divided between rental of $252.6 million and product sales of $49.7 million. That represents an increase of 102% over 1995. Their operating income for 1996 was $38.4 million. That represents a 119% increase over the operating income for 1995. Their net income for 1996 was $20.6 million which represents a 75% increase over 1995 and their earnings per share were $0.59 versus $0.36 last year, a 64% increase. Their comps for the year were 7%. Operating income for 1995 was 11.7% and for 1996 was 12.7%, so there was an improvement there. There is upside potential there that will come from the maturation of their store base. 42% of their stores on a weighted average basis in 1996 were less than a year old. In 1997 they anticipate it will be approximately 42% again, so there won't be a lot of leverage until that mix starts to swing in favor of the mature store base. Depreciation is approximately 29% of revenue.

REVENUE FOR Q4. Revenue for the fourth quarter was $97.6 million split between rental sales of $79.5 million and product sales of $18 million. Their operating income was $14.8 million. Their net income was $8 million and their comps were 9% for the fourth quarter. Same store sales were positive in their oldest markets (San Antonio, Portland OR, Seattle, etc.). They were not as positive as what the new stores were, but they are still positive and have been historically positive. The average revenue per store that they are doing in those markets is substantially higher than the average revenues being used in most financial models, but they don't want analysts to alter the models.

PRICING VERSUS BLOCKBUSTER. Blockbuster, in the fourth quarter, began making adjustments to their pricing nationwide. Hollywood Entertainment's marketing department did a survey of each of the major markets across the US and found that Blockbuster has increased their prices from what used to be $3 in almost every market with the exception of Manhattan to a range from $3.10 to $3.50 in other markets. Hollywood has seen that in essentially all the markets in the US. One of the interesting things that comes out of this, because Hollywood has not raised their prices since the opening of their first store (neither had Blockbuster), is that there has not been any movement in Blockbuster customer versus Hollywood. Just because Blockbuster has raised their price, Hollywood hasn't seen a group of customers coming into their stores complaining that Blockbuster raised prices and they want to come to Hollywood. The reason they have found that interesting is because they have had quite a bit of experience in the past with respect to reducing their price, as has Blockbuster, and in a competitive environment they have not had great success in the past in driving a substantial number of customers from their stores to Hollywood and vice versa. There seems to be some elasticity in the consumer's tolerance for price in their business. They are just beginning to experiment with pricing increases in 10 stores, but they are going to be more cautious rolling out price increases because they don't have the marketing muscle Blockbuster does to push transactions up if they are wrong about price increases.

COMPETITIVE ENVIRONMENT VERSUS BLOCKBUSTER. Hollywood Entertainment doesn't see the competitive environment any differently than they have in the past. Blockbuster is adjusting their inventory mix and condensing the amount of space they are using for video rentals and then adding into each one of their stores a selection of music, books, CD-ROM, and then additional concessionary items in the store. This could change the competitive environment. The theory behing Blockbuster's changes, as Hollywood Entertainment understands it, being that because the two companies' stores have substantial traffic going through them with such small transactions, that there is a lot of revenue to be gained by trying to figure out how to sell that customer who has already walked in the door, an additional item. Hollywood doesn't know that they outright disagree with the plan to increase the average size of the transaction by selling ancillary products. However, Hollywood anticipates not following Blockbuster's course and believe they are successful because they are the leader in the industry above all others when it comes to selection and having more copies of new releases. They believe that Hollywood video has been able to produce higher average revenues than Blockbuster or any other video store chain in the world without having nearly the marketing muscle because they are the category killer in their category. They say that when you walk into one of their stores it is very clear that they have more product than anyone else. Their hope is that if Blockbuster makes some of these adjustments, that it even further differentiates Hollywood from them.

NEW STORE OPENINGS. They opened 98 new stores during the quarter. They opened 25 new stores in the first quarter, 55 in Q2, and 72 in Q3. They did not make any acquisitions in 1996. Going forward with store openings, they are planning on opening 40 stores in the first quarter of 1997, 60 stores in Q2, 80 stores in Q3, and 120 stores during Q4. So they will continue to increase their rate of new store openings throughout 1997. They think the opportunity exists for them to open as many as 400 new stores per year. In 1996 they expanded from operating in 23 states to 30 states by the end of the year. The key to get to that 400 number is to be operating in essentially all of the states across the country. They will be in the majority of the states by the end of this year.

DECENTRALIZING THE COMPANY. The single biggest event that took place during the last year was the process of decentralization that the company went through. They have commented several times over the last 6 months that while they think it is obvious that the company knows how to select good quality sites, it is also obvious that they have a concept that works. What might not be so obvious is does the company have a management team in place that is capable of running a billion dollar plus retail organization, which they anticipate becoming in the very near future. It is for that reason that they decided to decentralize the operations of the company. They decentralized the company into four areas with corporate offices in Boston, Chicago, Dallas, and then a separate office from their main office in Portland, Oregon. Each one of those zones is or will be headed by a senior vice president of operations with full profit and loss responsibility. Each of the senior vice presidents have operated in a multi-unit national environment in their past in a capacity at least of a division vice president overseeing hundreds of stores. Each one of them has also operated in a decentralized environment in a growing company (e.g., Taco Bell, Wendy's, Payless Shoes, etc.). The company spent $2.3 million extra in general and administrative costs over what they had anticipated spending in 1996. That represents about $0.04 per share in earnings that they invested in 1996 that they had not anticipated investing until 1997. The reason they were able to do that because the performance reach of the quarters this year is very strong and they are still able to exceed the analyst consensus expectations while investing these extra dollars towards a future which they think will pay off handsomely in years to come.

STORE ECONOMICS. In the past there have been questions with respect to how well their new stores are performing. The bulk of their future revenues comes from new stores that they have just opened or are in the process of opening or have yet to open. They believe all of the analysts that cover Hollywood Entertainment today use a first year revenue number of $700,000 for the stores they open. That is a number they have exceeded in their stores for all of the last year. Looking at stores that opened in 1995 and the stores opened in 1996 they, as a group, have either exceeded that $700,000 number or are at least ramping up to exceed that number if they are less than a year old. The same can be said for those groups of stores that are open outside of their mature markets as well. Their average store that is over a year old does about $900,000 in revenue and produces approximately $200,000 in operating profit at the store level and the cash flow is a little more than that. A new store does a little over $700,000 in revenue and produces about $100,000 in operating income and free cash flow less its pre-opening expenses of about $15,000. A good general rule of thumb in measuring their stores is that they break even at about $500,000 a year in revenue. The store contributes about $0.50 on the dollar to the operating income line for every dollar above $500,000.

COST OF NEW STORES & INVENTORY REINVESTMENT. The cost of new stores is about $235,000 in inventory investment, $250,000 in fixtures, equipment, and leasehold improvements, and about $15,000 in other miscellaneous costs including pre-opening. And then with respect to the trend on the inventory investment, it doesn't matter whether it's first year, second year, third year, or whatever year, they budget approximately 25% of the topline revenue for reinvestment in inventory. So, it's a function of what the revenue is in that store. The depreciation doesn't matter either, they budget the store on a cash basis.

PURCHASING INVENTORY DIRECT VS. THROUGH A DISTRIBUTOR. Blockbuster is so large and purchases so many cassettes that they may be able to efficiently distribute their own product at a lower cost than what they are currently being charged by distributors. That is not the case at Hollywood. They only pay several points above the distributor's cost for their product and they don't believe, at least at this stage of their company's growth, that they can distribute the product at a breakeven from what it costs them in margin that they pay the distributors. The reason they are able to buy the product at essentially the same price as Blockbuster is because they purchase from distributors whose purchsing power meets or exceeds the purchasing power of Blockbusters. Those distributors look to Hollywood as being their largest customer so they pass their cost plus a few points on to Hollywood because it helps them meet some of their break points and get some of the discounts they want and then they don't pass those discounts on to the smaller stores which are still between 2/3 and 3/4 of the business today. Blockbuster can save some money going direct, but it is so minimal that it doesn't really give them a competitive advantage in terms of pricing and would not be enough of a savings for Hollywood to match.

NEW RELEASES COMING OUT THIS YEAR. As far as upcoming new releases, in the first quarter of this year versus the first quarter of last year, the titles are comparable with the possible exception of March. Last year in March there was Ace Ventura, Seven, and Braveheart. This year there's First Wives' Club, Hunchback of Notre Dame, and Space Jam. First Wives' Club is $100 million, Hunchback is $100 million and Space Jam is $86 million. Last year, Ace Ventura was $100 million, Seven was $89 million, and Braveheart was $67 million. So, in terms of total box office, March of 1997 is a little bit better, but comparing the two middle titles, Hunchback versus Seven, Seven would be a better rental title than Hunchback, but it's not a real significant difference. The other months would have been equal (January and February). If you go out into the second quarter in April, last year the two big titles were Bridges of Madison County and Waiting to Exhale. Bridges was $70 million and Waiting to Exhale was $62 million. This year 101 Dalmations and Sleepers will be released in April. 101 Dalmations will just be an okay sell-through, but probably as good as Waiting to Exhale, and Sleepers should be a very strong sell-through title. They expect it to be as good as if not better than bost of last year's titles. In May this year, Ransom, Jerry Maguire, and Star Trek First Contact are the three big titles that will be released. Last year's were Goldeneye, Jumanji, and Get Shorty. They think May of this year will be better than May of last year, but not substantially. All 3 this year will be very strong rental titles.

SELL-THROUGH TITLES VERSUS RENTAL TITLES. The company asked what impact the mix of sell-through titles versus rentals has on them. They answered that financially it's real easy because on a typical title they spend about $60 per copy for a rental title. For a sell-through title they pay about $12 per copy. So, they could buy three times as many copies per store and still spend about 60% of what they would have spent, and that's about what they do too. So, on a cost basis it is substantially less. On a revenue basis, it's slightly more. They will do a little more in revenue on a sell-through title than what they would have had that title been released on rental. The reason is that even though there are 10 million households buying a copy, there are still 90 million other households that did not buy a copy and they are bringing in 3 times the number of copies up front which creates greater interest. They are able to bring in 3 times the number of copies because the cost is substantially less. On top of that, they have the studios spending millions of dollars promoting that title at the time it's released on videocassette where normally on a rental-based title they have to rely on the advertising that occurred five months earlier when it was released to the theater. So, on a sell-through title they have the benefit of the recognizability from the theater run and another big advertising push from the studios at the time it is released to video.

ACQUISITIONS. With regard to acquisitions, when Hollywood first went public they identified 5 chains that were doing high volumes. There were only 5 other chains that were in that category that were also competing head-to-head with Blockbuster. They have acquired all 5 of those chains, so there are none left that they were interested in. Their strategy has been from day one to open up new units as rapidly as they can because their new units perform much better than any other competition does out there.

COMPETING WITH BLOCKBUSTER IN ESTABLISHED MARKETS. The company was asked about their performance against Blockbuster in Blockbuster's established markets. They responded that they have gone through a lot of Blockbuster's more established markets (Chicago, Atlanta, etc.) and they are doing quite well in those markets. Some of the Blockbuster stores were a little older and a little rundown. Some were smaller too and their locations aren't quite as good as locations that Hollywood competes against in the Western states which came later in Blockbuster's growth. Hollywood does a little better, but nothing substantial. The interesting thing about real estate too, it's one of the things that they can't go back and correct in short order. It gives Hollywood confidence that they can compete effectively, even against Blockbuster's strong brand.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.