Hollywood
Ent. 2Q
| Hollywood
Ent. 2Q
|
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) Hollywood Entertainment Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HLYW)") else Response.Write("(NASDAQ: HLYW)") end if %> UNION CITY, Ca., July 31, 1996/FOOLWIRE/ --- Hollywood Entertainment released Q2 1996 results after the market close yesterday afternoon. Revenues were $63,949,000 (85% rental, 15% sales). Net income was $3,005,000 and earnings per share were $0.09, above analyst consensus estimates of $0.07 per share.
Operating costs and expenses were $57,964,000. $4 million of that was G&A cost. Operating income was $5,985,000. Income before taxes was $5,009,000.
While they beat consensus earnings estimates by about 25%, their G&A expense was actually above what the analysts expected. This, however, was not by mistake. They have been and will continue to invest in the future by applying a portion of the earnings that have come in above analyst expectations towards the buildup of their management team prior to what they had originally budgeted. Right now they have a budget that dictates in each department when they can add to the management team. What they have done and will continue to do is, as the earnings of the company continue to exceed their internal expectations, they will apply a portion of those earnings toward allowing the departments to build up their management team in advance, which they think will pay off in the future.
The company started some promotions in the middle and latter part of Q2 that were mostly direct mail promotions targeting customers who haven't been in the store for 90 days and customers who had late fees and had not been in the store for awhile (under the theory that they were avoiding the store because they owed late fees). In each one of those promotions, they have seen very good results, some as high as 20% response rate. They are now rolling out those promotions system wide.
The company successfully increased their bank line from $75 million to $100 million. The banks they did that with were Union Bank of California and Key Bank. They felt comfortable using those two banks because they were banks the company felt could support them in their future capital needs and had the capacity to increase the lines of credit beyond what they're at right now. In addition, one of the reason why they took more time than what they expected is that they wanted to make sure that, in increasing the bank line, they were able to accomplish the exact same terms they had on the original $75 million which they felt were very favorable -- and they did accomplish that. The $100 million line gives them the ability to open more than 210 stores per year.
Their same store sales for the quarter were 6%. Video games were essentially flat over the same period last year, but the total comps were 6%. The older stores in their older markets also continued to produce positive comps. Year to date, the older Hollywood stores are also in the mid-single-digit range.
So far in Q3, while the Olympics have not affected business any more than what they built into their models, they have affected the company more than expected and have been equal to and sometimes even greater than having a major event like the Super Bowl day after day for the last couple of weeks. However, Hollywood Entertainment's business has been trending above expectations. As a result, even with the impact of the Olympics, they have had positive same store sales quarter-to-date, which puts them ahead of what they expected.
NEW RELEASES
The first half of 1995 was about equal to the first half of this year in terms of the quality of the new releases. January, April, and June last year were better than this year in terms of the release schedule, while February, March, and May were better this year. In Q3, it looks like August is going to be about the same in terms of quality of new releases compared to last year, while July was better than last year. September of this year will also be stronger than last year. October, which they are just getting preliminary indications on, is shaping up to be stronger than last year as well. The box office this Summer has been extremely strong with a good slate of movies, which bodes well for Q4 this year and Q1 1997 -- both of those quarters should be strong.
NEW STORE DEVELOPMENT
The new stores they are opening continue to perform at or above expectations. So far year-to-date they have added four new states, bringing the total number of states they are now operating in to 27.
They opened up 55 new stores this quarter. On top of those 55, they relocated 3 of the stores they acquired in 1994. In Q1 of 1995 they opened 16 stores, in Q2 they opened 17, in Q3 they opened 35, in Q4 1995 they opened 53, and in Q1 1996 they opened 25. So, in Q2 this year they opened three times as many stores as they opened in Q2 last year.
If you look at a rolling four quarters, they have opened up 168 new stores over the last 12 months -- just in Hollywood stores, this does not involve any acquisitions.
They are still planning to open more than 210 new stores this year and they plan to continue to increase their expansion pace until they reach their goal of opening 400 new stores per year. They hope to open 65 stores in both Q3 and Q4.
CORPORATE RESTRUCTURING: DECENTRALIZING COMPANY MANAGEMENT
Four months ago, they made the decision to move the company towards a decentralized management team. This is something they have been talking about for awhile, but just had not been able to afford to do it. They made that decision, the process has already begun and is planned to be completed by the end of this year. They have divided the company up into four zones -- the Western Zone, the Central Zone, the Southern Zone, and Eastern Zone. For the Western Zone, the office has not been opened up yet because they still haven't decided whether to operate that zone out of Portland or out of the San Francisco Bay Area and that decision will be made this week. The Central Zone is being operated out of Chicago and that office is already open. The Southern Zone is being opened in Dallas within the next 60 days. The Eastern Zone will be opened up sometime in Q4.
They have recruited 3 of the 4 Senior Vice Presidents that will be running these zones. All 3 of the people they have recruited so far, they believe, would be very good President/COOs of companies in the 300-500 store range. They are in the process of recruiting the fourth VP and will open that zone depending on when they find the right person for the position. These individuals will have, essentially, the equivalent of a COO responsibility out in the zones. They will have full P&L accountability and will control everything from real estate and construction, through store operations, marketing, human resources, etc.
The corporate office will retain full responsibility over the information systems and the accounting area and legal area which are appropriate to be maintained centrally. And they will still retain responsibility over the final site approval. The store design will also still be done out of the corporate office but, in reality, they have so many store design packages already that the field offices will just be taking one of the current designs off the shelf and using it. The other thing that will be maintained at the corporate office is the "image" side of the marketing. * 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. | |
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