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Analyst: Coinstar Remains 'Healthy'

31 Jan, 2011 By: Erik Gruenwedel

Heading into Coinstar Inc.’s Feb. 3 fourth quarter (ended Dec. 31) results, Wedbush Securities analyst Michael Pachter is projecting “solid” growth prospects for the kiosk operator, despite the recent negative pre-announcement for its Redbox subsidiary.

Earlier this month, Coinstar lowered its Q4 revenue guidance to $391 million, from $415 million to $440 million, blaming underperformance and category mismanagement at Redbox. The company’s 2011 revenue guidance was cut to $1.7 billion from $1.8 billion.

The pre-announcement sent shockwaves through the home entertainment industry, with some declaring the honeymoon over for kiosks and another notch in the belt for online disc rental pioneer Netflix — despite pronouncements to the contrary from Netflix CEO Reed Hastings.

“We believe management learned a lesson, and don’t expect overly aggressive guidance going forward,” Pachter wrote in a Jan. 31 note.

The analyst believes Coinstar will see positive contribution from new coin-counting kiosks resulting in a 12% increase in “same-store” comps.

“We believe that a 12% comp can generate at least $0.50/share of incremental earnings, and expect new kiosks to generate some positive earnings,” Pachter wrote.

Kiosk competitor NCR Corp. (Blockbuster Express) releases financial results Feb. 3.

Meanwhile, Eric Wold, analyst with Merriman Capital in New York, echoed Pachter, calling Redbox’s problems with underperforming rentals — specifically with titles delayed 28 days — “a hiccup.”

“It has been evident over the past three quarters that the introduction of the 28-day delayed titles and Blu-ray into the kiosks has required a new inventory management learning curve at Redbox,” Wold wrote in a Jan. 31 note. “While only a few weeks into [the first quarter], January had eight delayed titles reach Redbox kiosks, including the hit titles of Inception, Despicable Me and The Town.

“Hopefully management can outline some initial progress that gives investors comfort that the reduction in [full year 2011] guidance was enough or possibly even too much.”

Wold added that while no announcement on Redbox’s digital strategy is expected before Coinstar’s Feb. 16 investor day, “any update on progress would be viewed by us as a positive.” His firm believes Walmart and Amazon remain the most likely partners for Redbox in the digital space.

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