Hollywood Entertainment bonds probably aren't worth it, says Gimme Credit analyst

By Paul Deckelman

New York, Oct. 15 - America loves going to the movies - but the analysts at the Gimme Credit High Yield research service aren't exactly singing "Hooray For Hollywood" - Hollywood Entertainment Corp., that is.

In a research note Wednesday, analyst June Giroux asserted that the Portland, Ore.-based movie rental company's credit measures "could worsen if EBITDA doesn't meet growth expectations, and we don't think investors [in Hollywood Entertainment's 9 5/8% senior subordinated notes due 2011] are compensated for the risk at current yields."

Giroux noted that with some 1,800 video rental stores coast to coast, the company is the second-largest video-rental operator in the nation, behind industry leader Blockbuster Inc., and said that revenue gains from its new Game Crazy video game sales and rental "store within a store" could help keep at bay Blockbuster and retailing giant Wal-Mart, which also sells and rents movies and video games at its store locations and online.

The analyst shrugged off the less-than-expected gain in third-quarter comparable-store sales versus a year ago (the company had projected a 12% rise in sales at stores open at least a year but reported only a 7% gain), noting that other financial measures, such as revenues and EBITDA were up respectably in the quarter.

But while Giroux anticipates that the company will still meet its earlier EBITDA forecasts for 2003, spurred by "a slew of hit movies heading for the home video market in the current quarter-The Matrix Reloaded, for one," as well as the growing Game Crazy business, the total debt load, including operating lease obligations, is a "huge" $2.2 billion, and the financial picture may become clouded by expansion and share-buyback initiatives.

Giroux, for instance noted that although full-year free cash flow is likely to total $210 million, fully $150 million of that is already earmarked for expansion. The company has already spent $10 million buying back shares, and could spend up to $40 million repurchasing shares by year-end.

"These cash flow and balance sheet actions by management have been a mixed bag for bondholders," Giroux wrote, adding that while Gimme Credit "doesn't see many near-term dangers to the company's business model . . . management, with its continued expansion plans and share buybacks, is clearly equity-friendly," and bondholders are not compensated for the risk of worsened credit measures at current yields.

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