Hollywood Entertainment Corporation

FOUNDED: 1988 VARIANT NAME: Hollywood Video

Contact Information:

HEADQUARTERS: 9275 SW Peyton Lane Wilsonville, OR 97070
PHONE: (503)570-1600
FAX: (503)570-1680
EMAIL: info@hollywoodvideo.com
URL: http://www.hollywoodvideo.com

OVERVIEW

Founded in 1988, Hollywood Entertainment Corporation is today the second largest video retail chain in the world, trailing only Blockbuster in size. The company has grown from a single store in Portland, Oregon, into a chain of more than 1,800 retail outlets. The majority of the company's revenue is generated by the rental of motion pictures in both the DVD and VHS formats and video games. The remainder of the chain's sales are accounted for by the sale of new and used videos and video games. Unlike a number of its competitors Hollywood Entertainment has grown its chain mostly through organic growth rather than acquisitions. Nearly 95 percent of the company's superstores opened since 1995 were opened as new stores. The company projected it would open approximately 50 new stores during 2002 and would grow its store base by roughly 10 percent a year thereafter.

The video retail chain was founded by Mark Wattles in 1988 with the opening of the first Hollywood Video store in Portland, Oregon. Wattles and his wife personally ran the first store. The imminent death of the video rental business, rumors of which have abounded almost from the inception of the industry, are not causing Wattles to lose any sleep. He remains confident that the advance of technology will gradually lead to even greater profits rather than sound the death knell for the industry. "We can't be afraid of technology in this business," Wattles said. "I believe technology should be embraced."

COMPANY FINANCES

For 2001 Hollywood Entertainment posted a profit of $100.4 million on revenue of approximately __BODY__.38 billion. This represented a major turnaround from the company's performance in 2000, which saw a net loss of $530 million on revenue of almost __BODY__.3 billion. For 1999, the company reported a net loss of $51.3 million on revenue of nearly __BODY__.1 billion. The company said its sharp improvement in 2001 financial results was largely attributable to improved operating performance in its existing store base, adjustments to the company's valuation allowance on its net deferred income tax asset, and the closure of its electronic commerce operations at Reel.com in June 2000.

Hollywood Entertainment's revenue increased by $83.3 million, or 6.4 percent, in 2001, primarily due to an increase of 6 percent in comparable store revenue. Another factor that favorably impacted the company's 2001 revenue was an increase of 62 in its weighted average number of stores. The company reported a sharp increase in rental gross margin as a percentage of rental revenue, which climbed in 2001 to 67.1 percent from 45.8 percent in 2000. This improvement was the result of changes the company had made in the final quarter of 2000 in estimates regarding rental inventory lives and residual values. In 2000 rental gross margin as a percentage of rental revenue had decreased to 45.8 percent from 68.8 percent in 1999.

Prospects for 2002 were looking very bright indeed in early spring of 2002. Interviewed in April 2002 on CNBC, Mark Wattles, chairman and CEO of Hollywood Entertainment, attributed the company's strength to a couple of factors. "Well, we've got two things going for our company right now." One, he said, was the company's new management team, brought in at the end of 2000. "I'm the founder of the company. I came back to the company at that time, brought a new COO, a new CFO as well. And then on top of that we're in a great industry with a lot of momentum right now." The company's stock, which had traded in a range of __BODY__ to $18 a share over the previous 52 weeks, was at the top of its range in early April 2002.

Asked what was driving business, Wattles cited the phenomenal growth in popularity of DVDs, "which is the fastest growing entertainment technology in the history of the industry. That's benefiting us right now. And then we've got probably the most exciting thing of all since I have been in the industry, and that's the growth of games, which is just starting to kick in." Wattles also said that any thought of overtaking Block-buster as number one in the business was, frankly, "a little unrealistic." He said, "The growth opportunity for us in the United States is probably about 3,000 stores, and we have about 1,800 today. Blockbuster has 5,000 stores, so I think they'll maintain that number one position."

ANALYSTS' OPINIONS

Most security analysts in the spring of 2002 were taking a decidedly bullish view toward the stock of Hollywood Entertainment and some of the other leaders in the video retail industry. As of early June 2002, all analyst recommendations for the company's stock were evenly split between Strong Buy and Buy. The company's stock, as well as that of some of its competitors, got a shot in the arm in the wake of the terrorist attacks on the World Trade Center and Pentagon on September 11, 2001. Stunned by the unprecedented attack on America, millions of frightened U.S. citizens looked for ways to entertain themselves at home. This gave businesses favored by apprehensive couch potatoes a strong lift.

Frank Gretz, a technical analyst with Shields & Company, in late October 2001 told CNNfn interviewer Alan Chernoff: "I also like the stay-at-home theme like Block-buster, Movie Gallery Inc., Hollywood Entertainment."

HISTORY

Mark Wattles, founder of Hollywood Entertainment Corporation, first got into the video retail industry in 1984 when he opened Downtown Video in Portland, Oregon. A couple of years later, Wattles decided that video rental kiosks in convenience stores were the wave of the future, so with a few partners, he opened Convenience Video. Only a year later, he decided that the industry's future lay in the video superstore, so he pulled out of Convenience Video. In June 1988 Wattles founded Hollywood Entertainment and four months later opened the fledgling company's first store in Portland. He took care to grow his company slowly and by year-end 1991, the company reported a net income of $281,000 on sales of $5.1 million. Only a year later, the chain had grown to a total of 15 stores, all in the Pacific Northwest, and the company's revenue had more than doubled to slightly more than $11 million. Even more surprisingly, Hollywood Entertainment's profit had soared to almost __BODY__.2 million.

In 1993 Wattles decided to take the company public to raise capital for further expansion. In July 1993 the company's initial public offering on the NASDAQ national market netted $10.4 million. By year's end the chain's number of stores had climbed to a total of 25. For the year as a whole, Hollywood posted a net income of $2.1 million on sales of $17.3 million. In early 1994 the company made a second equity offering to the public, netting $23.6 million, much of which was used to acquire the 33-store Video Central chain, headquartered in San Antonio, Texas. Another 11 stores were added to the Hollywood chain in May 1994 when the company acquired California-based Eastman Video. On the heels of the Eastman acquisition, the company picked up another 10 stores in California and Nevada with its acquisition of Video Park. Hollywood went back to the market again with a third equity offering in August 1994 that yielded $63.6 million, which was used to open 33 new "superstores." The company posted a profit of $8.1 million on sales of $73.3 million in 1994. By the end of 1994, the Hollywood Video chain had grown to a total of 113 stores in eight states.

Hollywood's acquisition spree continued in 1995. In the first quarter, the company acquired a 14-store Minnesota chain called Title Wave, shortly after which the company went back to the market with its fourth equity offering, this one netting $95.4 million. This new injection of funds was used to finance Hollywood's acquisition of a 42-store Midwest chain called Video Watch. At the same time the company was growing through acquisition, new superstores were being added. By the end of 1995, the chain had grown to a total of 305 outlets in 23 states. Net income for 1995 climbed to $11.8 million on revenue of $149.4 million, more than double its sales in the previous year.

As industry leader Blockbuster moved to diversify its product mix, adding magazines, books, and magazines to its offerings, Hollywood opted to remain focused on video rentals. In the middle of the 1990s, the video retail industry experienced something of a slowdown, but Hollywood bounced back quickly. The size of the chain grew dramatically in 1996, adding 250 new stores for a total of 551 outlets in 42 states. The company's profit hit $20.6 million on revenue of $302.3 million. Despite instability in the industry, Hollywood continued to grow its chain in 1997, adding 356 new stores for a total of 907 in 42 states. Sales for the year hit $550.5 million.

In April 1998, Hollywood opened its 1,000th store, an outlet in Mesquite, Texas. The chain also introduced five-day rentals in 1998. The following year saw a surge in the popularity of DVD rentals, and Hollywood moved to meet this new demand by sharply increasing its inventory of DVD titles. The chain's revenue continued to grow, topping the billion-dollar mark in 1999. In 2000 Hollywood's sales reached almost __BODY__.3 billion, climbing in 2001 to __BODY__.38 billion.

STRATEGY

Hollywood Entertainment, having resigned itself to being number two in the video retail industry, has crafted a business strategy designed to enhance its current position. The five key components of that strategy call for the company (1) to provide broad selection and superior service; (2) to provide excellent entertainment value; (3) to capitalize on DVDs; (4) to capitalize on new game platform rollouts; and (5) to pursue organic store growth.

To ensure that its outlets offer customers broad selection and superior service, the chain's superstores typically carry more than 7,000 movie titles on more than 16,000 VHS videos and DVDs, as well as a wide range of video games. To satisfy the demand for hit movies, each stores usually stocks 100 to 200 copies of such films. In terms of providing excellent entertainment value, Hollywood believes its pricing structure ($3.79 rental for hit films and __BODY__.99 for catalog movies on VHS; $3.79 for all DVDs; and video games for $4.99 and $5.99) and rental terms offer consumers convenient entertainment and excellent value.

With rentals of DVDs expected to continue their climb in popularity, Hollywood expects to increase its stock of videos in this new format accordingly. With the proliferation of video game platforms, the company has expanded its operations in this area to provide video game enthusiasts with a marketplace where they can buy, sell, or trade new and used games. This business initiative provides for the establishment of "Game Crazy" stores within stores to capitalize on the skyrocketing demand for video games. Since the mid-1990s, nearly 95 percent of the outlets opened by the company have been new stores and not stores acquired from other video chains. Hollywood hopes to continue growing its chain in this fashion.

INFLUENCES

One of the most significant trends in the video retail industry of the early twenty-first century has been the surge in popularity of videos in the DVD format and video games. Hollywood has moved aggressively to capitalize on both these trends. The chain's overall inventory and selection of DVD titles has been sharply increased. To meet the frenzied demand for video games, the company introduced its "Game Crazy" store-within-a-store marketing concept. Such "Game Crazy" outlets, operating in nearly 70 of the chain's stores as of the end of 2001, will be expanded strategically throughout the chain in the years to come.

CURRENT TRENDS

Basic changes in the relationship between the major motion picture studios and video retailers have resulted in significant benefits to Hollywood Entertainment and other major players in the video retail industry. The move from traditional "rental" pricing of new releases to a revenue sharing arrangement has increased the volume of newly released videos in Hollywood's outlets, aligned the economic interests of the studios more closely with those of video retailers because studios now share a portion of the rental revenue; and increased overall revenue because of the greater availability of videos in high demand.

Videos in the newer DVD format are generally acquired from the major studios on a "sell-through" basis, priced around $17 or $18 per video. However, by the spring of 2002 Hollywood Entertainment had struck revenue sharing agreements with two major studios, and it is hoped that this trend will continue.

PRODUCTS

Hollywood Entertainment's product lineup at its Hollywood Video stores consists of two major categories: products for rental and products for sale. The former category, which includes videos in both VHS and DVD formats and video games, accounted for roughly 83 percent of the company's revenue in 2001. The typical Hollywood Video superstore carries more than 7,000 movie titles on over 16,000 videocassettes and DVDs and approximately 550 video game titles. The movie rental inventory consists of new releases and so-called catalog movies, which are organized according to genre: Action, Comedy, Drama, Children, Musical, and so on. The company neither rents nor sells adult movies in any of its stores.

Generating the remaining 17 percent of the company's revenue in 2001 were sales of new and used movies in both VHS and DVD formats, video games, and concessions, including popcorn, soft drinks, and candy. Although capital constraints have limited the selection of new DVDs available for sale in Hollywood Video stores, the company has experienced a sharp increase in the sale of previously viewed movies in this format. Sales of video games (new and used) have increased significantly in stores that house a "Game Crazy" outlet—a store within a store that provides enthusiasts with a forum where they can buy, sell, and trade new and used games.

CORPORATE CITIZENSHIP

To fulfill its corporate responsibilities to the communities in which it operates, Hollywood Entertainment sponsors Spotlight on Education, Spotlight on Families, and Spotlight on Fundraising programs. The company's Spotlight on Education programs are composed of two main components: A Spotlight on Students and A Spotlight on Teachers. Under A Spotlight on Students, each participating K-12 school receives 100 Outstanding Achievement Awards that can be used by teachers and coaches to encourage and reward their students. Each award may be redeemed at any Hollywood Video outlet for a free rental of any New Release, DVD, or Film Library movie. A Spotlight on Teachers provides each participating school with 100 Educational Entertainment Coupons that can be distributed to faculty members who may redeem them for the free rental of any Hollywood Video Film Library title for use as an intructional aid in the classroom.

Under the company's Spotlight on Families program, participating local nonprofit organizations are each given five free rental certificates that can be used to reward volunteers, encourage donations, and brighten the lives of children and families in need. Nonprofit organizations interested in participating in a Spotlight on Families program may file an application online at Hollywood Entertainment's Web site. Under Hollywood Entertainment's Spotlight on Fundraising program, schools and nonprofit organizations may purchase Hollywood Video gift cards from local scrip organizations to raise monies. The gift cards can then be used to rent and/or purchase movies in both VHS and DVD formats and video games.

EMPLOYMENT

As of December 31, 2001, Hollywood Entertainment employed a workforce of 22,660 employees, the vast majority of whom (21,685) worked in the video retail chain's retail stores and zone offices. The remainder, slightly less than 1,000 in number, worked in the company's corporate administrative and warehousing operations.

SOURCES OF INFORMATION

Bibliography

"Business Summary: Hollywood Entertainment." Multex Investor, 2002. Available at http://www.marketguide.com.

Clifford, Lee. "Stay-at-Home Stocks: American Have Cut Back on Spending. But That Doesn't Mean They're Not Buying at All." Fortune, 12 November 2001, 197.

Haines, Mark. "Hollywood Entertainment-Chmn & CEO-Interview." CNBC/Dow Jones Business Video, 10 April 2002.

"Hollywood Entertainment Corp.—History." Gale Business Resources, 2002. Available at http://galenet.galegroup.com/servlet/GBR.

"Hollywood Entertainment Corporation." Hoover's Online, 2002. Available at http://www.hoovers.com.

Hollywood Entertainment Corporation 2001 Annual Report. Wilsonville, OR: Hollywood Entertainment Corporation, 2002.

Hollywood Entertainment Corporation Home Page, 2002. Available at http://www.hollywoodvideo.com.

For an annual report:

on the Internet at: http://www.hollywoodvideo.com

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Hollywood Entertainment Corporation's primary SIC is:

7841 Video Tape Rental

Also investigate companies by their North American Industry Classification System codes, also known as NAICS codes. Hollywood Entertainment Corporation's primary NAICS code is:

532230 Video Tape and Disc Rental