New Video Rental Chain Backs Away From Big Box

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The heyday of movie rental stores like Hollywood Video and Blockbuster is a fading memory, but an L.A. company thinks it can fill the need left by the demise of the old-style chains.

Point.360 is a publicly traded company that works for the major movie studios in formatting, editing, colorizing and remastering movies and TV shows. The company also stores and distributes DVDs for the studios.

But in its most recent quarterly filings and conference call May 10, the company announced its intention to expand its Movie Q project, a new format for small video rental stores the company has developed.

Movie Q looks to carve out a middle ground between big-box video retailers such as Blockbuster and compact video vending machines such as RedBox.

A Movie Q store has stands of DVD cases for perusal. To rent or buy one, customers use a machine on the wall that looks like a large ATM. They select the movie or video game, paying for it with cash, debit or credit cards. The machine dispenses packaged discs.

Because a Movie Q shop has a small footprint – about 1,200 square feet compared with 5,000 square feet or more for a full-size video store – it has lower real estate costs. Also, it requires only a part-time worker to open, close and stock the store, so labor costs are minimal. The stores have an inventory of 10,000 titles, compared with a few hundred for the typical video vending machine.

Point.360 opened its first Movie Q in 2010, and now has one store each in La Mirada, Westminster and Costa Mesa. In preparation for its expansion, the company has two more locations leased in Norco and Murietta.

In a conference call in conjunction with its quarterly filing, Chief Executive Haig Bagerdjian said Movie Q is a proven concept and is ready for build-out.

“It’s a vessel that needs to be launched,” Bagerdjian said. “Movie Q becomes a cash cow when we have 20 to 30 stores, and the optimum is 200 stores.”

The timing of the expansion stems from the company’s improved finances.

In April, Point.360 moved its corporate headquarters and some of its editing labs from Ontario Avenue in Burbank to a 65,000-square-foot-building in the Glassell Park neighborhood of Los Angeles. It was already renting the site and using it as a warehouse. By leaving a 46,000-square-foot building in Burbank, the company will save $1.2 million annually in rent and utilities, according to Point.360’s most recent quarterly report.

That number is important because the company, which has been losing money for years, could become profitable with savings of that magnitude. In the first nine months of the current fiscal year, it lost $167,000.

Chief Financial Officer Alan Steel told the Business Journal the money will provide financial flexibility to pursue other initiatives.

“The move will certainly improve cash flow, which is the No. 1 driver of any business, and it’s a fairly significant amount,” Steel said.

However, James Dion, president of retail consulting firm Dionco in Chicago, is skeptical that a brick-and-mortar video store like Movie Q will become a viable business.

“I can’t imagine customers renting and returning DVDs anymore,” he said. “That ship has sailed. People are streaming online. They’re on Hulu or their iPad. There’s a reason Blockbuster went bankrupt and it didn’t have much to do with labor costs or real estate costs. Demand was just so low.”

Ryan Kugler, chief executive of video liquidator DVA in Burbank, has occasionally bought old DVDs from Point.360 and is familiar with the company. He sees a drawback in that Movie Q shops are often unmanned. RedBox’s machines are in supermarkets, so there’s a manager on the premises to help if something goes wrong.

“Customer service is still a big issue,” Kugler said.

While developing Movie Q, Point.360 stumbled on to its other big project, called AIM, or automated inventory management. The same system it uses to deliver DVDs to customers can work for other products such as books and medicines, Bagerdjian said. Point.360 is in talks with big-box retailers to test the concept in stores this summer.

Stock issues

In the conference call, Bagerdjian described how Point.360 originally intended to pursue the Movie Q expansion four years ago when it sold a part of its business that formatted and distributed TV commercials for large ad agencies. DG FastChannel in Dallas purchased the commercial business for $10 million.

The deal left Point.360 flush with cash. In addition, the company had financial backing from GE Capital and Bank of America.

But the financial meltdown put Point.360 in a tailspin. Revenues declined from $45 million in 2009 to $35 million last year. As a result, the growth of Movie Q was put on hold until now.

“We never really had the opportunity to go beyond development of the project,” he said. “(Now) our job is to tell the wonderful story about this little company that is poised to succeed.”

Bagerdjian believes Point.360 is undervalued by the stock market. Shares, which traded at an all-time high of $2.58 soon after the initial public offering in 2007, closed at 55 cents May 23.

The company has received a notice of noncompliance from Nasdaq because its stock now trades below the $1-per-share minimum price standard. The company has until March to get its share price above the $1 threshold.

“We believe the economy is still an issue,” said Point.360’s Steel. “However, we have positioned the company to take advantage of both customer demand and lower costs. Together that will create a more profitable environment for us.”

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