Movie Gallery files bankruptcy, to shut many stores

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By Jonathan Stempel)

NEW YORK (Reuters) - Movie Gallery Inc, the operator of Hollywood Video stores, has filed for Chapter 11 bankruptcy and plans to close a "significant number" of its roughly 2,600 stores in the United States and Canada.

The filing comes as Movie Gallery and video retailer rivals such as Blockbuster Inc suffer from falling market share as more consumers use alternatives such as Google Inc's YouTube, Netflix Inc's mail-order service, and kiosk operators such as Coinstar Inc's Redbox.

Last month Blockbuster lowered its earnings forecast after a disappointing holiday sales season.

Movie Gallery and four affiliates filed for protection on Tuesday with the U.S. bankruptcy court in the Eastern District of Virginia, its second filing in less than three years. Its Movie Gallery Canada Inc affiliate was not part of the filing.

The company said it employs close to 19,100 people. It was not immediately clear how many might lose their jobs, or how many stores will be closed.

Movie Gallery has been reviewing bids from liquidators to close 800 stores, people familiar with the matter said last week. The company also operates stores under the Movie Gallery and Game Crazy brands.

"Absent the filing of these Chapter 11 cases and the corresponding ability to exit a substantial number of underperforming stores and further deleverage its capital structure, the company likely would not be able to continue as a going concern," Chief Restructuring Officer Steve Moore said in a court filing.

Movie Gallery previously filed for bankruptcy in October 2007 and emerged the following year with private equity firm Sopris Capital Associates LLC and affiliates as its majority equity owner, a regulatory filing shows.

Sopris did not immediately return requests for comment.

Moore said Movie Gallery's video rental business has been hurt by increased competition, while its videogame business has suffered from falling sales of Wii software and hardware and a dearth of high-profile videogame title launches.

He said the company's revenue fell to roughly $1.4 billion in 2009 from roughly $2 billion in 2008, and its fourth-quarter operating loss increased more than 52 percent to $129.3 million from $84.8 million.

Movie Gallery said it owes more than $540 million in principal to its first- and second-lien lenders. It said that by October 2009 it had become delinquent on many obligations and faced possible looming defaults under loan covenants.

Founded in 1985 in Dothan, Alabama, Movie Gallery now has offices in Wilsonville, Oregon. The company once operated nearly 4,800 stores, following its 2005 purchase of Hollywood Entertainment Corp.

Movie Gallery said it hired Moelis & Co as its investment banker and Gordon Brothers Group to help close stores.

The case is In re Movie Gallery Inc, U.S. Bankruptcy Court, Eastern District of Virginia, No. 10-30696.

(Reporting by Jonathan Stempel; Additional reporting by Tom Hals in Wilmington, Delaware, Sue Zeidler in Los Angeles, and Santosh Nadgir in Bangalore; editing by John Wallace and Lisa Von Ahn)

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