Hollywood Video is no blockbuster

Movie Gallery (NASDAQ: MOVI), the parent company of Hollywood Video, is considering closing many of its 4,600 stores, putting the company up for sale, or both, after the second-largest brick-and-mortar video store rental chain, behind Blockbuster Inc (NYSE: BBI), failed to meet the requirements set by its lenders.

USA Today said the 2,000+ Hollywood Video stores in urban areas, which are in direct competition with Blockbuster, look most vulnerable. By contrast, the Movie Gallery stores are "in smaller markets without much competition," Sterne Agee analyst Arvind Bhatia told the newspaper. JP Morgan believes Blockbuster could benefit from any store closings.

Unfortunately, it's not only Movie Gallery facing these problems. Industry-wide video store rentals fell 13.1% in Q1 compared to the same quarter in 2006, according to Blockbuster. With new movies being released on DVD this quarter, including 300 and Blades of Glory, the business could see a boost in revenues soon.

But it's Movie Gallery that has to fight with the growing online business from Netflix (NASDAQ: NFLX) and Blockbuster. The company asked its lenders to relax some debt conditions and hired Lazard Freres as a financial advisor. While analysts are skeptical about Movie Gallery finding a buyer, the company's real estate may be attractive to some private-equity groups and could warrant a look.