Analyst: Digital Delay Spooking Redbox Investors7 Jan, 2011 By: Erik Gruenwedel
The lack of a digital initiative for Redbox, coupled with concerns regarding upcoming fourth-quarter results has contributed to a 14% decline in parent Coinstar’s shares during the past three weeks.
Analyst Eric Wold with Merriman Curhan Ford in New York said investors fret Redbox will lag significantly to competitor initiatives when it finally unveils details of a digital strategy. Coinstar management has reiterated that a kiosk-based initiative is in the works and would be announced at the appropriate time.
Wold believes a Redbox digital service will shoulder much of the incremental investment on a major third-party retail partner, which the analyst contends is best suited for Walmart, where Redbox situates about 18% of its 24,000 kiosks.
“While this may reduce the incremental long-term profit potential from digital, we are more focused on the reduced upfront risk and capital spend, the faster time-to-market and the potential for structuring it in a way to drive incremental traffic to the Redbox kiosks,” Wold wrote in a note.
The analyst believes Redbox’s fourth-quarter results will mirror the third quarter on lower-than-expected revenue and higher margins due to the fact that three of the top four box office titles released in the quarter were animated, which historically do not rent well.
“We remain comfortable at the low-end of guidance (about $343.1 million) and would not be surprised to see consensus estimates move lower ahead of the company’s earnings release date,” Wold wrote.
The analyst said that in addition to structuring a subscription plan that would drive incremental traffic to Redbox kiosks in the vicinity of Walmart stores, the retail behemoth could co-opt alternative payment options for an overlooked segment of the population.
“We believe Walmart’s experience with low-income and un-banked consumers may enable the creation of an upfront, pre-paid cash plan that would allow those customers to use Redbox kiosks as a lack of credit/debit cards currently eliminates them as customers,” Wold wrote.
Coinstar releases Q4 results Feb. 3.