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Unlucky Pennies for Coinstar

By Dave Marino-Nachison (TMF Braden)
September 16, 1999

My parents played a cruel joke on Coinstar (Nasdaq: CSTR) when I turned 18, presenting me with an outsized plastic Budweiser bottle with a piggy-bank top and a heavy load of pennies. (Kids, don't drink underage, or you'll end up like me and not, as some would have you believe, John Elway.)

In the years to follow, I dutifully added a penny here and there to the point where attempting to move said bottle would require Mark McGwire-like arm strength. There are, it's safe to say, more pennies in that bottle than any man or woman not serving a life sentence would ever want to roll.

It's stories like that which keep executives at Bellevue, Washington-based self-service coin-counting company Coinstar awake at night.

Stories like this will probably keep them awake for several nights to come: Coinstar's shares spilled nearly half of their market value today after the company said third-quarter revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA) will miss analysts' consensus estimates despite hitting record levels.

Revenue is expected to be in the range of $20 million to $22 million, compared with $13.6 million for the same period last year. EBITDA is estimated to be in the range of $3 million to $4 million compared with the $1.1 million reported for the third quarter of last year. A year ago, Q3 revenues showed 75% growth -- better than the company's optimistic estimate for this year. (Coinstar didn't turn an operating profit in Q3 1997, so an EBITDA comparison doesn't help much.)

Coinstar's concept is a pretty smart one: people get sick of counting change so they bring it in to their area grocery store to be counted at 600 coins per minute and replaced by a receipt that can be redeemed for cash or store credit after a fee is subtracted. But Coinstar's success is entirely reliant on the customers' conviction that their loose change is valuable rather than bothersome.

It appears that's not the case, to hear CEO Jens Molbak's laundry list of woes:

  • During July and August, a national coin shortage (caused not only by people like me but people who throw all their change into shoeboxes and gutters) led many retailers and banks to announce change buybacks of their own in which they paid a premium;

  • The Treasury's introduction of the new state quarters renewed interest in coin collecting and the dreaded -- at least at Coinstar -- "H" word: hoarding;

  • Coinstar decided television advertising was costing too much, ramped up its use of less-expensive radio ads, and ended up getting exactly what it paid for; and

  • Suddenly the company believes customers are reacting negatively to its fee increase in Q4 of last year, to 8.9% from 7.5%. You can bet that when your customers are made up of people who count coins carefully, they'll notice a hit of nearly an extra penny-and-a-half per dollar -- particularly when they can get a premium elsewhere.

    And what's becoming more evident is that the American public is showing less faith in copper and silver; the company admitted as much in a late-July press release in which it bemoaned an estimated $7.7 billion in change sitting in American Ball jars.

    All this, it should be noted, comes shortly after the company raised $94 million in a secondary offering and announced plans for a large-scale upgrade of its network of coin-counting machines. Equipment upgrades and new funding are good things for most any company, but it's not clear how they will help fight any of the problems Molbak mentioned above.

    Tonight after work, I plan to do my part for Coinstar when I venture, for the first time, over to the Super Fresh on 48th Street with my big plastic Budweiser bottle -- assuming I can still lift it.

    That should do wonders for the portion of my weekend plans that involves heavy tipping, but Coinstar is going to need more help than even my bottle can provide.

    Related Links:
    Coinstar Web Page
    Coinstar Message Board
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