Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Coinstar Has a Problem

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Coinstar (NASDAQ: OUTR  ) may be the last remaining player to be growing in the fading art of DVD rentals, but that may not last too much longer.

Shares of the Redbox parent tumbled on Thursday night after posting mixed quarterly results.

Revenue climbed 8% to $564.1 million, well short of the $580.2 million that Wall Street was targeting. The bottom line held up better relative to expectations. Yes, net income, operating profits, and free cash flow all fell during the period, but the $0.75 a share that Coinstar posted in continuing earnings -- or $0.93 a share once you back out the operating loss from its recently acquired NCR kiosks -- landed ahead of the $0.73 a share that analysts were forecasting.

Don't read too much into the big hit from the 6,200 Blockbuster Express kiosks that Coinstar acquired last year. NCR makes ATMs, folks. It wouldn't have sold its flick-spewing automatons if money was flowing in the right direction in that business. The real problem here is Coinstar's dwindling revenue growth.

Redbox fades to black
The average Redbox rental rose from $2.52 during the holiday quarter of 2011 to just $2.57 this time around. Keep in mind that Redbox rolled out a 20% price increase at the end of October last year. The company has also seen its pricier Blu-ray rentals double over the past year. Shouldn't we have expected more than just a 2% increase in the value per rental?

There are two reasons for the slip. One problem is that video game rentals made up a smaller part of the revenue mix this time around. That isn't a surprise. Anyone who has seen video game retailer GameStop slash its same-store sales guidance four times over the past year could've seen this coming. The video game industry has been in a funk for years. This is only going to get worse, especially if reports that the new Xbox won't accept rentals prove accurate.

The other problem is that folks are simply returning their rentals sooner. This is scarier than you probably think. If Redbox finds that more of its customers are returning their discs the next day -- instead of paying $1.20 a night for every additional night -- it probably means that the kiosks are losing their more affluent customers. Redbox's value proposition has always brought out the penny-pinchers who don't want to spring $5 for a pay-per-view rental from the comfort of their living room Barcalounger, but now it may be down the stingiest of movie buffs.

Digital tries to save the day
Sure, bulls will argue that Redbox Instant by Verizon -- the video service that Verizon (NYSE: VZ  ) and Coinstar introduced in beta and plan to roll out commercially by next month -- will help. Redbox will finally take on Netflix (NASDAQ: NFLX  ) in streaming, readying Redbox for the inevitable decline in DVD renters that Netflix and Blockbuster have been experiencing for a couple of years now.

We'll have to see how that all plays out.

Coinstar seems to be confident enough. The midpoint of its revenue guidance for all of 2013 -- $2.465 billion -- is less than Wall Street was modeling, but it's 12% over 2012. Put another way, Coinstar sees the trend of decelerating growth continuing on an annual basis but reversing itself after this past quarter's single-digit spurt.

That seems a bit ambitious, don't you think?

The flag-waving clincher here is that Coinstar is buying itself time to make that happen. Coinstar sees revenue in the first quarter posting a year-over-year gain of 0% to 4%. That's flat growth at the low end! Wall Street was eyeing a 10% advance.

In its prepared remarks it's even bracing investors to expect its Redbox performance metrics during the first half of 2013 to be comparable to 2011, and that's scary since we're talking about the company before the price cuts and when Blu-rays were a smaller part of revenue mix.

Coinstar believes that things will bounce back during the second half of the year, but the smart money has to be with the skeptics here. Just as GameStop has been in denial as its fundamentals crumble around its model, don't be surprised if Coinstar's aggressive guidance for 2013 comes down with every passing quarter.

The wild card, naturally, is Redbox Instant by Verizon. If the service takes off -- and Redbox claims that hundreds of thousands of people have requested access to the beta -- this story will turn itself around. Unfortunately, it's going to be extremely difficult to catch up to Netflix in building out its digital vault, and the allure of four nightly DVD credits a month will continue to fade as folks wean themselves off optical discs.

The shares may be selling off in light of the soft revenue and even softer guidance, but this isn't a buying opportunity. Let Coinstar prove that it can live up to its lofty growth goals for the latter half of this year. You deserve that much as an investor.

Dive deeper into Coinstar with a rosier perspective
Is it the right time for investors to grab Coinstar stock? To answer this question, you're invited to check out The Motley Fool's new comprehensive research report on the opportunities, risks, and must-watch areas in Coinstar's future. Simply click here now to claim your copy today.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2244958, ~/Articles/ArticleHandler.aspx, 9/28/2016 1:18:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,197.44 -30.86 -0.17%
S&P 500 2,155.77 -4.16 -0.19%
NASD 5,295.15 -10.56 -0.20%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
OUTR $0.00 Down +0.00 +0.00%
Outerwall CAPS Rating: **
NFLX $96.16 Down -0.91 -0.94%
Netflix CAPS Rating: ***
VZ $51.96 Down -0.53 -1.01%
Verizon Communicat… CAPS Rating: ****