The Red Envelope Strikes Back

Coinstar (NASDAQ: OUTR  ) might have a Netflix (NASDAQ: NFLX  ) problem on its hands. The automated retail company just reported its first-ever same-store sales decline at Redbox DVD rental kiosks. But that disappointment is just the start. Coinstar also gave a weak forecast for Redbox growth over the first half of this year.

Management pointed to a couple of reasons for the shortfall, with the main culprit being a drop in rental length for its most active users. That segment ended up returning DVDs faster than usual in the quarter. Instead of holding the disks at home for a few days -- and letting those nightly charges rack up -- these renters studiously returned their disks on time. Still, as those users come back to their "normal renting patterns," management is confident that it can engineer a 10% rise in rentals over the full year.

But I think Redbox has bigger problems than just a more return-happy customer base. How about the fact that Netflix isn't tossing millions of disgruntled DVD customers into the market anymore?

To see what I mean, take a look at Coinstar's last five quarters of sales growth for Redbox kiosks:

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012 

27.1%

28.1%

16.5%

4.2%

(4%)

Source: Coinstar financial filings.

Now compare that with the quarterly subscriber loss figures for Netflix's DVD rental business over that same time (in millions):

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012 

2.76

1.08

0.85

0.63

0.38

Source: Netflix financial filings.

Looking at these two tables, it's hard not to get the impression that Coinstar has been benefiting from Netflix's massive DVD subscriber exodus. And as Netflix recovers from its pricing and PR fiascos and those losses moderate, that tailwind for Coinstar's DVD business is disappearing.

In fact, Netflix may be aiming to defend the DVD market more aggressively. While its focus is on streaming growth, the company's DVD business is still an important source of profits. Netflix even ran some DVD-only subscriber promotions over the holiday quarter. CFO David Wells recently told investors that the promo helped DVD subscriptions, and that "I think you'll see us use it sporadically."

It sounds like there's at least some fight left in the DVD rental business.

While Netflix's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


Read/Post Comments (6) | Recommend This Article (1)

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  • Report this Comment On February 08, 2013, at 4:19 PM, AceInMySleeve wrote:

    This is almost certainly the wrong analysis. Coinstar's same-kiosk sales would not be sensitive to Netflix losing *fewer* customers. Coinstar is highly sensitive to the quality of new releases, and likely the saturation of the market with high #'s of kiosks.

    Netflix streaming likely affects redbox more than it's DVD even, and neither all that much I would suspect.

    I do think there is some welcome strength in Netflix DVD though. That business might still be worth a couple billion in future cash flow.

  • Report this Comment On February 08, 2013, at 4:40 PM, TMFSigma wrote:

    @aceinMySleeve - I absolutely agree with you that there are also other reasons for Coinstar's decreasing sales growth. New release titles play in there, for sure.

    But I would say that you can't ignore the losses Netflix saw on the DVD side, which had to give Coinstar a tailwind, especially around Q4 of 2011 and Q1 of last year. That period saw 3 million customers who were used to paying $18 a month for DVDs jump back into the market for renting physical disks.

    -Demitri

  • Report this Comment On February 11, 2013, at 10:01 AM, MRossell wrote:

    There is a fundamental flaw in this whole analysis!

    I am not sure where the author is getting the 4% decrease in sales for Q4 2012. If you look at the SEC Filing (Page 43) you will note that Q4 Sales were 564 Million versus Q3 Sales of 537.5 Million giving a 4.93% sales INCREASE.

    Considering that the Coin division revenue is mostly flat and the Venture division is losing money, all this extra sales come from the Redbox division

  • Report this Comment On February 11, 2013, at 6:51 PM, TMFSigma wrote:

    @MRossell - the numbers are right. Coinstar provides a breakdown of Redbox sales in a separate filing. It's easiest to check it out on the company's IR page here:

    http://phx.corporate-ir.net/phoenix.zhtml?c=92448&p=quar...

    But the link for the spreadsheet with the Redbox data is also here:

    http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

    The company lists -4% for same store sales in Q4.

    -Demitri

  • Report this Comment On February 12, 2013, at 12:29 PM, MRossell wrote:

    Thank you @TMFSigma, but I want your help then to understand some of the earning remarks.

    On the same link you send me there is another supplemental called "Prepared Remarks 2012 Q4" where they state "In Q4 Redbox kiosk rentals increased approximately 6% year over year and 7% sequentially from Q3. The corresponding average check was $2.57, an increase from $2.52 in Q3, but slightly lower than expected"

    So they increased it 7% from Q3, or decreased it 4% as stated on the supplemental spreadsheet.

    Thank you for the answer.

    Rossell

  • Report this Comment On February 12, 2013, at 7:37 PM, TMFSigma wrote:

    Hey Rossell, I believe the difference is that in the remarks they're talking about total rentals, but in the detailed breakdown they are giving "same-store" figures. That's a more accurate view of what the average kiosk produced in the quarter, as compared to the prior-year quarter. It's a metric that most retailers use to judge their store success while stripping out the effect of a growing store base.

    The total revenue figure was up, but that was helped along by the addition of hundreds of new kiosks that weren't around in last year's tally. What you really want to see is how each kiosk performed compared to the prior year. When you compare apples-to-apples like that, kiosks performed a bit worse this quarter than they did last year, by 4%.

    So I guess the answer is: both. Rental revenue was up by 7% in total, but when you factor in the hundreds of extra kiosks it took to get there, "same-store" rental revenue was down by 4%.

    Hope that helped,

    Demitri

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