Movie Gallery Inc, the operator of the Hollywood Video rental chain, plans to close 805 poorly performing U.S. stores after falling sales and mounting losses led to its second bankruptcy in three years.

The closings affect one-third of the company's 2,415 U.S. stores, and several thousand of the company's roughly 19,100 employees probably will lose their jobs. Movie Gallery said it also operates 184 stores in Canada.

Movie Gallery and video retailer rivals such as Blockbuster Inc have suffered as more consumers switch to services such as Google Inc's YouTube, Netflix Inc's mail-order service and kiosk operators such as Coinstar Inc's Redbox.

Last month, Blockbuster lowered its earnings forecast after a disappointing holiday sales season.

Movie Gallery and four affiliates filed for protection on Tuesday with the U.S. bankruptcy court in the Eastern District of Virginia. Its Movie Gallery Canada Inc affiliate was not part of the filing.

Absent the filing of these Chapter 11 cases and the corresponding ability to exit a substantial number of underperforming stores and further deleverage its capital structure, the company likely would not be able to continue as a going concern, Chief Restructuring Officer Steve Moore said in a court filing.

The company also operates stores under the Movie Gallery and Game Crazy brands. It disclosed the planned store closings and said it hired Gordon Brothers Group to help liquidate the stores in a separate filing. The company also said it hired Moelis & Co as its investment banker.

Movie Gallery previously filed for bankruptcy in October 2007. It emerged the following year with private equity firm Sopris Capital Associates LLC and affiliates as its majority equity owner, a regulatory filing shows.

Sopris and Gordon Brothers did not immediately return requests for comment.

REVENUE FALLS, LOSSES MOUNT

Movie Gallery's video rental business has been hurt by increased competition, Moore said, while its videogame business has suffered from falling sales of Nintendo's Wii console and games, and a dearth of high-profile videogame title launches.

The company's revenue fell to $1.4 billion in 2009 from $2 billion in 2008, and its fourth-quarter operating loss increased more than 52 percent to $129.3 million from $84.8 million, Moore said.

Movie Gallery owes more than $540 million in principal to its first- and second-lien lenders, it said. By October 2009, it was delinquent on many obligations and faced possible looming defaults under loan covenants, it also said.

Founded in 1985 in Dothan, Alabama, Movie Gallery now has offices in Wilsonville, Oregon. The company once operated nearly 4,800 stores, following its 2005 purchase of Hollywood Entertainment Corp.

Movie Gallery shares last traded on January 29 at 7.9 cents on the Pink Sheets, Reuters data show.

The case is In re Movie Gallery Inc, U.S. Bankruptcy Court, Eastern District of Virginia, No. 10-30696.

(Reporting by Jonathan Stempel; Additional reporting by Chelsea Emery in New York; Tom Hals in Wilmington, Delaware, Sue Zeidler in Los Angeles, and Santosh Nadgir in Bangalore. Editing by John Wallace, Lisa Von Ahn and Robert MacMillan)

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