Analysts Circle the Wagons in Support of Coinstar’s Redbox

4 Feb, 2011 By: Erik Gruenwedel

The day after Coinstar released quarterly results confirming previous announcements about missteps with its Redbox subsidiary, several analysts issued notes underscoring cautious support for the kiosk vendor.

Redbox’s misfortune comes as the kiosk rental industry finds itself at a crossroads following unbridled growth in recent years. NCR Corp., which owns and operates Blockbuster Express kiosks, Feb. 3 said it would re-evaluate the business at the end of the year should profitability not be at hand.

Redbox said it ended 2010 with 30% market penetration in the rental market. Still, significant inventory issues both in and out of its control — including 28-day embargoes and overstocking Blu-ray/DVD titles — contributed to Redbox posting a $17 million shortfall that is expected to mushroom to $30 million in the first quarter (ending March 31), according to Michael Pachter with Wedbush Securities in Los Angeles.

Pachter said Redbox’s business suffered from competing platforms, such as transactional video-on-demand, sellthrough and video stores (including Blockbuster), which all had day-and-date availability of advertised new releases.

“Redbox didn’t have 40% of the movies that were advertised, resulting in further cannibalization of its rentals in favor of DVD purchases,” Pachter wrote. “The Q4 problem was worse than reported results suggest … [and] we remained baffled about how the company’s modest miss for the December quarter could translate into a much larger miss for the [upcoming first quarter].”

Ralph Schackart with William Blair & Co. in Chicago said the company’s gross margin on disc rentals dropped to the lowest level in three years (54.4%) — a result he attributed in part to management’s inability to stock appropriate copy depths at kiosks. He remained upbeat about Redbox’s positive results from multiple-kiosk locations, yet lowered Q1 revenue projections from $421 million to $413 million.

Eric Wold with Merriman Capital in New York reiterated thast the kiosk rental market is not a mature business, underscored by a 17% to 20% projected install base growth of Redbox kiosks this year.

“While management is in a new learning curve, we remain confident in their ability to overcome these issues and deliver in 2011,” Wold wrote.

John Kraft with D.A. Davidson & Co. in Lake Oswego, Ore., said DVD kiosks still provide the most convenient access and the lowest price point to movie rentals, at a time when traditional video stores are evaporating.

“While it remains to be seen, we do believe the management team can make appropriate adjustments,” Kraft wrote.

Pachter concurred, saying he believes Coinstar is a healthy company with solid earnings growth prospects — despite being plagued by “out of control” inventory purchases.

Analysts Circle the Wagons in Support of Coinstar’s Redbox

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