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Redbox Lowers Fiscal Projections on Reduced Rental Nights

16 Sep, 2013 By: Chris Tribbey, Erik Gruenwedel

Redbox’s corporate parent Outerwall Sept. 16 lowered financial projections for the rest of the year due in part to consumers renting movie discs for fewer nights.

Citing increased promotional discounts that have resulted in newer consumers renting discs for only one night, Redbox expects the average rental revenue to drop as much as 9 cents in the third quarter (ending Sept. 30). It also expects upwards of 6.5 million fewer rentals in the fourth quarter as studios shift new releases later in the year and into 2014.

Studios have also ramped up sellthrough efforts through early retail releases on digital ahead of packaged media, which includes kiosks.

Rentals for July and August grew year-over-year 13.4% and 15.7% respectively, with July representing Redbox's best rental month in its history, with approximately 74 million rentals. Redbox expects both rentals and revenue per kiosk to increase compared to comparable periods in 2012. In addition, unique credit and debit cards used in July and August increased 11% year-over-year, while rental frequency improved in July and August, compared with the same periods in 2012.   

However, Redbox had expected a higher level of rental growth year-over-year due to a more linear content slate, a lack of competition from the Summer Olympics as experienced in 2012, and 5% year-over-year customer growth in the first half of 2013. 

"Although both rentals and revenue for Redbox increased significantly in July and August over 2012 levels, they were not to our expectations,” Outerwall CEO Scott Di Valerio said in a statement. "We continue to adjust our Redbox promotional strategy, including a lower level of overall promotion, to better align with anticipated consumer trends, and are also reducing our content and direct operating costs."  

In other words, lots of people are still renting movies from kiosks. But they're returning them the next day, instead of the following day. With the margin on a one-night $1.20 rental slim, Redbox ups the margin when renters keep the movie an additional night. In fact, Redbox has said that the average rental generated about $2.24 in revenue. When consumers return discs in 24 hours, that revenue and margin is cut accordingly.

Di Valerio said Outerwall would “accelerate” review of the company’s new ventures, including coffee vending and electronic recycling. Outerwall plans to repurchase an additional $100 million of common stock beginning in the fourth quarter.

Looking ahead, Outerwall sees Redbox upping revenue 4% to 7% annually through 2015. The company said it will align its cost structure to be reflective of Redbox's growth curve and management's overall focus on managing content and direct operating costs to maximize profit and cash flow. 

Redbox revenue in the second quarter increased 4.5% to $479 million, with its share of the disc-rental market exceeding 50% for the first time.

Wedbush Securities analyst Michael Pachter said the preannouncement underscored Outerwall management’s inability to correctly project future market conditions, and not the health of the physical rental market. Specifically, Pachter said Outerwall (formerly Coinstar) has a history of advising lofty revenue projections for its business units it later has to revise downward.

“We do not believe that the DVD rental business is in a state of persistent decline,” Pachter wrote in a Sept. 17 note.

The analyst said consumers will continue to rent physical discs so long as they are timely and represent good value. Pachter said Redbox currently enjoys significant market share precisely because its kiosks are convenient, offer great selection, with rentals priced at a fraction of transactional VOD.

“The proliferation of Redbox kiosks was a key driver in the shift from brick-and-mortar rental to kiosk rental, and the closing of 9000 unprofitable brick-and-mortar stores was the key reason for the decline in DVD rental the last five years,” Pachter wrote. “We completely reject the notion that value-conscious consumers will switch from low-priced DVD rental to high-priced VOD simply because it’s available.”

B. Riley & Co. analyst Eric Wold said silver linings in the preannouncement indicated as much as a 10% year-over-year increase in average kiosk disc rentals. He said ongoing implementation of so-called “customer relationship management” (CRM) initiatives should help Redbox better analyze rental data, market conditions and estimate future consumer behavior.

“We continue to believe as the kiosk-level initiatives kick into gear and other physical rental segments see their customers migrate to Redbox, kiosk rental patterns will continue to move higher in the coming years,” Wold wrote in a Sept. 17 note.

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