Friday, August 11, 2006

Notablecalls - Paperstand

The WSJ's "Tracking the Numbers" column discusses Movie Gallery (MOVI), saying that a happy ending may prove tough. More than half the stock-mkt value of Movie Gallery disappeared after the film-rental chain reported a large and unexpected Q2 loss. Now the really bad news for shareholders: Coming attractions could include another horror show. To avoid a sequel to yesterday's bloodletting, Movie Gallery must dramatically cut its debt, massively boost its cash flow or at least get more breathing room from its lenders. Otherwise, the co faces another day of reckoning in early '07, an analysis of its finances shows. For months, Movie Gallery has had problems with its debt covenants, the financial thresholds it must meet to stay in good graces with its lenders. In March, the co got its banks to relax those levels temporarily so that it could stay in compliance with them throughout '06. Without that relief, the co would already have violated its covenants, tantamount to a default. But that relief runs out in '07, and Movie Gallery must go back to meeting the old, stricter covenant levels, a hurdle that its current financial performance suggests is too high. One covenant requires Movie Gallery to keep its net debt, or debt minus cash on hand, to a certain level in relation to its EBITDA. A back-of-the-envelope calculation shows the co's net debt right now is about 4.63x its EBITDA for the last 12 months. That is within the relaxed maximum level of 5.75 that Movie Gallery must meet, but in 1Q07, once the current relief ends, that maximum will drop to 2.25x EBITDA. To be in compliance then, Movie Gallery would have to either double its EBITDA, cut its debt in half, or achieve some combination of major changes on both. "They've got to do something," said Michael Pachter, of Wedbush. "I would think their restructuring is going to have to be something with a cash generator. They have to pay debt down."

Barron's Online highlights Nordstrom (JWN), which shares are down 20% sinc Jan.30 on anxiety over consumer spending in the coming months, weak women's apparel sales and fears that profits have hit a plateau. Yet high-end shoppers are still paying up for designer fashions. And with a cheap P/E multiple, new store openings speeding up and plenty of room to expand, Nordstrom's shares seem like a bargain. "It's cheap relative to its potential," says Bob Mitchell, of Northern Growth Equity Fund. "A solid operator, if anything, it should take mkt share. I think you would want to pay a premium for it."

Barron's Online reports that three insiders at Revlon (REV), including billionaire Chmn Ronald Perelman, plunked down $1.13m to purchase nearly 1.04m class A shares in the open mkt since Mon. These are the first insider purchases in 2 years. Given the dramatic decline in the stock, insider buying is a "reasonably bullish sign," says Jonathan Moreland, director of research at "The biggest plus of this insider buying is it would seem to suggest that bankruptcy is less likely than if you hadn't seen these transactions."

DigiTimes repors that forthcoming Dell's (DELL) AMD-based (AMD) notebooks, which are expected to be available in late Oct or early Nov, will be equipped with ATI (ATYT) Mobility Radeon graphics chips. Although it will not be the first time for the mkt to get AMD-based notebooks with ATI GPUs inside, Dell's offering will be the first launched after AMD's recent announcement of acquiring ATI. Dell's decision to use ATI GPUs in AMD-based notebooks indicates that the impact of AMD's acquisition of ATI on the PC industry will likely start intensifying in the near future.

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