Loose change brings in a steady but small part of Coinstar's (Nasdaq: CSTR) revenue and income, putting the pressure to deliver on its Redbox DVD kiosks and new streaming movie venture, Redbox Instant, as well as anything else it can automate into a vending machine, like its Rubi coffee kiosks.
How is the company performing in this age of declining DVD usage and severe streaming competition?
For one thing, management is controlling costs. While total revenue has increased more than 50% since 2010, operating costs as a percentage of revenue have decreased from 70% to 68%, and general and administrative expenses have been stable, around 9% of revenue. Additionally, even though marketing expenses are less than 2% of revenue, that percentage has decreased each year from 2010.
While a class action lawsuit filed in 2011 that alleged that executives failed to disclose material information put the integrity of management into question, it seems that they've proven their operations skills. And with the current CFO and head of supply chain Scott Di Valerio taking over as CEO in April, the business should continue to be efficiently run.
Even though coins were developed when humans first discovered how to shape bronze, Coinstar continues to innovate how we trade coins for goods and services. Recently, the company partnered up with eBay's (Nasdaq: EBAY) PayPal to allow customers to deposit loose change directly into their digital wallets, as well as to withdraw money from their PayPal accounts. In Coinstar's test market of Dallas, "40% of kiosk users who used the PayPal feature went back to use PayPal on a Coinstar kiosk an average of two times a month."
There are, of course, threats to the stable profits from turning coins into more easily spendable currency. The biggest for Coinstar is likely the large proportion of business it has with its top retail partners. Wal-Mart (NYSE: WMT), Walgreen (NYSE: WAG), and Kroger(NYSE: KR) made up 16%, 16%, and about 11%, respectively, of revenue in 2012. The contracts with these companies can be terminated rather quickly; Wal-Mart's, for example, can end "in as little as 90 days' notice."
The most important part of Coinstar's future rests with its opportunities outside of DVDs and coins. It owns 35% of Redbox Instant, its streaming video joint venture with partner Verizon(NYSE: VZ). Redbox Instant is in line with Netflix's (Nasdaq: NFLX) price point, at $8 per month for streaming videos, but also gives customers four DVD or video game rentals per month at any Redbox kiosk. Currently, however, Netflix has a larger collection of titles.
The rollout of Coinstar's Rubi coffee kiosks was delayed because of design changes, but incoming CEO Di Valerio stressed the company's focus on delivering the coffee machines in the second quarter of this year. In addition to coffee, the company continues to test selling tickets and holds a stake in ecoATMs, which allow consumers to swap old electronics for cash.
New buybacks and debt
Coinstar's board authorized $250 million worth of share buybacks in January. The company has already repurchased $45 million worth of shares this year, and this new authorization shows that the company wants to continue to return value to shareholders. In 2010, the company bought $49 million of its own shares; in 2011, $63 million; and in 2012, $140 million. Of course, only time will tell whether the buybacks are justified.
Coinstar also issued $350 million in debt at a 6% interest rate, due in 2019. There are many different ways this debt could go to work, from funding its expansion of Redbox in Canada, or adding new Rubi kiosks, or acquiring content for Redbox Instant, or even implementing the above-mentioned share buybacks. The company shouldn't have a problem paying for the new debt, as in the last quarter it was able to cover its interest payments more than 13 times over with its earnings.
While DVD players are still in use, customers will still want DVDs. Redbox now offers both conveniently located DVD rental and online streaming, which sets it apart from other streaming services. But its selection of streaming titles is limited, and it might be too late to join the streaming media fight.
Even if you're not comfortable with Coinstar's odds of succeeding with Redbox, it offers other potential cash cows in the automated kiosk industry. While none are a sure bet, management seems to tightly control finances and realize the need for continued innovation.
Fool contributor Dan Newman owns shares of eBay. The Motley Fool owns shares of eBay and Netflix. Motley Fool newsletter services have recommended buying shares of eBay, Coinstar, and Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.