BLOWOUT SELLS LEASED DEPARTMENTS TO MOVIE GALLERY

DAN ALAIMO

DOTHAN, Ala. -- About 11 leased-space video departments in Ralphs, Food 4 Less and Fred Meyer stores were among those acquired by the Movie Gallery, here, when it bought 90 in-store video shops from BlowOut Entertainment, Portland, Ore., last month. The remainder of the departments were all in Wal-Mart and Kmart supercenters, said a Movie Gallery official.

The sale came as BlowOut filed for Chapter 11 bankruptcy protection on March 22. The company will apparently now go out of business, operating as debtor-in-possession until the sale closes, sometime in the second quarter of the year. BlowOut executives did not return calls for comment.

Movie Gallery will pay $2.4 million for the video shops, which generated $18 million in revenues in 1998. BlowOut does not expect any assets to be left for common shareholders after creditors are paid. BlowOut was delisted from the NASDAQ stock exchange on November 19.

Major creditors are vendors and landlords with claims ranging from about $2 million to $5000, according to the bankruptcy petition. Among BlowOut's voting securities, 24.9% are held by Japan's Culture Convenience Club, the leading video retailer in that country, and 9.9% by Rentrak Corp., Portland, Ore. Rentrak had a controlling interest in BlowOut prior to spinning the company off in late 1996, at which time the company operated 200 departments, mostly in Wal-Mart and Kmart supercenters.

"We continue to have tremendous confidence in the concept," said Ron Berger, Rentrak's chairman, president and chief executive officer. "But we think they could have done a better job of execution." This was not necessarily the fault of management, but the result of difficult financial circumstances, he noted.

Among the problems were difficulty finding the wherewithal to keep up with Wal-Mart's rapid deployment of supercenters, the increased competitive pressure from large video specialty chains and the consequent lack of resources to buy new releases.

"In the video business that is sort of a kiss of death. Once you can no longer order the quantities that you need to satisfy demand, from then on it is just a matter of time before you go under," said Berger.

BlowOut had started with supermarket departments and then expanded rapidly with the Wal-Mart and Kmart supercenters. Last April, the company had 173 departments -- 140 in Wal-Mart Supercenters, based in Bentonville, Ark; 18 in Super K Centers, based in Troy, Mich.; 12 in Ralphs supermarkets, based in Compton, Calif.; and three in Fred Meyer stores, based in Portland, Ore.

As recently as two years ago, the company was still reporting good same-store growth, industry observers noted. But after that came the downturn in the Japanese financial markets, which had helped fund its growth, and then increased competition from chains like Blockbuster, Hollywood and Movie Gallery, the observers said.

At Movie Gallery, J.T. Malugen, chairman and chief executive officer, said the transaction "represents a substantial growth opportunity for Movie Gallery with limited risk. As the only major video specialty store operator that focuses primarily on operating in small-town markets, we have developed a significant expertise in managing stores that are relatively small by industry standards," he said.

"By bringing our copy breadth and depth initiatives to these new stores, we believe we can more fully leverage the outstanding retail traffic the host stores provide. We also expect to benefit from other economies of scale, including those related to spreading corporate overhead costs across a larger business base," he said.

Berger expressed confidence in Movie Gallery's ability to run the former BlowOut departments. "We think that Movie Gallery is an excellent choice of merger partner for BlowOut, because Movie Gallery is already an expert in operating rural small-town concept stores. They have a proven success record. They are obviously good managers and good operators. I think that Movie Gallery is going to do a fine job with those stores," he said.