Coinstar Cuts Q4 Earnings Forecast, Cites Sluggish Blu-ray Demand

Lower than expected demand for higher-priced Blu-ray titles and 28-day-delay agreements for movie titles in its Redbox movie rental service were among factors Coinstar cited when it dramatically cut Q4 and full-year 2010 earnings estimates. Analysts, however, faulted the company’s overly aggressive forecasts and competition from streaming rental models and retail competitors.

Coinstar now expects Q4 per-share earnings to come in between 65 and 69 cents, compared with earlier projections of 79 to 85 cents. Revenue for Q4 2010 is forecast to rise 31 percent from year over year to $391 million, compared with previous fourth quarter 2010 guidance in the range of $415 million to $440 million.

"Performance of the Redbox business during the fourth quarter was not in line with our forecast,” said Paul Davis, CEO of Coinstar. It was the company’s first holiday season with 28-day delayed titles, “and we underestimated the impact that the delay would have on demand during the fourth quarter,” he said. The company had purchased “to a higher level of demand” for Blu-ray titles, too, he said, and while consumer visits to rental kiosks remained strong, the “basket size” came in short of projections. The company had also expected stronger performance from Q4 releases, despite a 16 percent lower box office for scheduled releases compared with Q4 2009, it said. In anticipation of demand for new releases “that did not materialize,” the company had removed older inventory early, which also impacted revenue and gross margin, it said. In addition, Redbox consumers took advantage of the company’s “rent and return anywhere” program to a higher level than expected, leading to “temporary imbalances in available titles across the kiosk network."

Analysts were skeptical of Coinstar’s claims. According to Wedbush Securities, Thursday’s preannouncement was more a reflection of “overly aggressive guidance than underlying weakness.” Wedbush maintained its outperform rating but lowered its price target to $62 from $67.

Richard Greenfield, an analyst with BTIG, blogged last week that Redbox had already lived through the impact of delayed content in Q2 2010 and “they cannot use that excuse in Q4 2010.” He noted that Despicable Me and Inception were delayed in Q4 but that other fresh DVDs in each month of the quarter were available to fill in. He also observed that redbox received Toy Story 3 day-and-date in early November. He cited past Redbox assertions that consumers step down to second or third choices when first choices aren’t available, but last week’s statement that basket size fell short of projections indicates consumers are “far choosier” than the company had indicated, Greenfield said.

Greenfield also suggested Redbox numbers could be suffering from consumers’ increased preference for the streaming rental model through connected TVs and Blu-ray players from sources including Blockbuster, Amazon and Netflix. He said aggressive marketing campaigns from Blockbuster and Wal-Mart highlighting movies not available at Redbox also played a role in disappointing redbox results.

To address the issues affecting Q4 performance, Redbox’s Davis said the company has taken steps to better align content purchases with customer behavior, including offering more day and date titles and “better allocating Blu-ray titles to high-demand areas.” The company has also adjusted field processes “to minimize the impact of higher levels of migration on overall rentals” in the rent and return anywhere policy, he said. Early results indicate the company has “begun taking the right steps” to address negative issues, he said, warning that issues including purchasing changes take longer to show results in financial performance.

Revenue at redbox grew 38 percent year over year in Q4, indicating consumer demand for redbox DVD rentals “continues to be robust,” Davis said. Consumers rented more than 144 million titles during the quarter, and same store sales grew 12.5 percent over Q4 2009, he said, while reaffirming the company’s commitment to DVD kiosk rentals.

The company expects fourth quarter adjusted earnings before interest, taxes, depreciation and amortization from continuing operations of between $78 million and $82 million, a year-over-year increase of 38.8 percent to 45.9 percent, compared with guidance in the range of $84 million to $90 million. EBITDA was impacted by lower revenue and gross margin, it said. Coinstar shares closed 27.1 percent lower in Friday trading to $41.50.