HOLLYWOOD ENTERTAINMENT TO SPEED UP GAME CRAZY ROLLOUT

In April, Wattles said HE saw potential to add 100-200 GC departments within next year at estimated conversion cost of $110,000 per store (CED April 24 p6). Company then had only 66 GC departments operating chainwide, he said. At average store, GC departments had contributed $42,000 in operating profit on $390,000 in incremental revenue last year, and GC sales averaged 50% higher in first quarter this year vs. year earlier. Wattles said Thurs. that average GC department now took up 900 sq. ft. of average 6,800 sq. ft. available in each store. He said cost of adding GC department now was about $150,000 and still was adding 50% in revenue to each store that had it. Wattles said company had seen average annual $800,000 in revenue at each location produced $400,000 more with addition of GC in first year alone after remodeling of location for total of $1.2 million in revenue. Stores with GC then see additional $100,000 in revenue in 2nd year, he said. EBITDA at store that has added GC department has increased 33% to $233,000 from $175,000 after remodeling, he told analysts.

Wattles said HE was able to add GC departments without reducing other products in stores thanks to fact that its stores were 6,800 sq. ft., which he said was larger than many competitors’ locations. He said HE already had started testing 700-sq.-ft. GC departments “with very good preliminary results.” If those locations prove to be effective, Wattles said, 1,400 of its 1,800 stores could fit in GC department. He also said company was about to start testing 500-sq.-ft. GC departments -- and if that size proved effective 1,650 of company’s stores could hold GC department. Company has been adding GC departments to its stores at pace of 10 per week, with peak weeks reaching 15, Wattles told analysts. Although company plans to open 200 new stores next year, he said only half were likely to have GC department initially because sizes of those new stores were planned, in many cases, before GC strategy was strengthened.

HE also said Thurs. it was boosting its same sales forecast as result of accelerated GC rollout to about 10% for 4th quarter and 12-14% for fiscal 2003. In July, company said it expected only 4% growth in 4th quarter and 2-3% gain in 2003. It also revised its targeted fiscal year growth in adjusted diluted earnings per share for fiscal 2003 at 20%, up from 15% predicted in July. In April, Wattles said HE’s game business began its growth in 4th quarter of last year and continued expanding in first quarter of this year. “In my opinion, games could become an even bigger benefit to the industry than DVD has been,” he said, citing some analysts’ projections that videogames business could grow 50% per year in next few years. Wattles said 400-500 new videogame titles would be released in 2002, more than in any single year in industry’s history. “The more titles that are released, the more interest there is in renting,” Wattles said, crediting success of chain’s “try before you buy” videogame strategy. He said videogame rentals at that point accounted for 10% of HE’s business, “and I believe 10% is only half of what it could be.”

Wattles also said GC acceleration made good economic sense because traffic for videogames already existed. Customers who rent games tend to be largest movie renters, he said, and he has seen no evidence yet that there were any stores that wouldn’t benefit from adding GC, although “we certainly have some stores that respond better to the [game re-merchandising] than others.” When asked by analyst whether HE was concerned about GC expansion in light of more cyclical nature of games compared to movie business, Wattles said no, because he believed there now was “very slim” chance of game demand’s dropping off by much. Reasons, he said, are that average gamers were getting older, more game titles were being offered than ever before, backwards compatibility of most new console platforms.

Also promising, Wattles said, is that “revenue sharing has happened” already for videogame category as more and more manufacturers have indicated “they're very interested” in such agreements. That has happened as game business has become more akin to movie business, he said. HE already has signed revenue- sharing deals with 2 game makers and significant number of others have indicated they were open to it, Wattles said. He didn’t identify 2 game companies and spokesman was unavailable for comment. As game makers find it harder to get shelf space because of large surge in number of products, revenue sharing is likely to become more appealing to additional game makers, Wattles said, and HE will agree to give all titles shelf space at HE stores as long as HE can share revenue on all those titles. In related news, published report Thurs. said Rentrak had signed revenue-sharing deals with Majesco and Vivendi Universal Games (VUG). As part of VUG deal, distributor will offer 12 games from VUG, probably starting in Nov., including Bruce Lee, Crash Bandicoot, Lord of the Rings, The Scorpion King. Report also said Rentrak already was taking orders on first revenue-sharing title -- BloodRayne from Majesco, scheduled to ship later this month -- and distributor will be offering all of Majesco’s upcoming games available on revenue-sharing basis. Comments were unavailable from companies. Report also said Rentrak expected to announce revenue-sharing deal with one more company by end of this week and deals with as many as 10 additional game makers by end of month.