Movie Gallery's shares move toward zero

The country's second largest retail movie rental chain, Movie Gallery (NASDAQ:MOVI) has collapsed in early trading, down 75% to $.50. The stock has traded as high as $6.78 over the last 52 weeks.

The company blames soft sales for causing it to fail to honor the financial terms of its senior credit facility. Movie Gallery says it is down to $50 million in cash, and may have to sell the company. But, it is unclear whether creditors can simply step in an take the company over, a move that would certainly hurt holders of the common stock.

Movie Gallery is actually a fairly big business. With sales of $2.5 billion last year, it has revenue that is close to 40% of Blockbuster's, which is the No.1 retailer in the industry. Blockbuster's (NYSE:BBI) shares have been up recently as the company brought on a new CEO. But, the stock is still about 50% below where it traded two years ago.

The Movie Gallery troubles should cause concern among Blockbuster shareholders. Traffic at Movie Gallery stores is down sharply and there is no reason to believe that the Q2 trend would not have also hurt the larger company.

Douglas A. McIntyre is a partner at 24/7 Wall St.