The outlook for small ticket retailers, such as Outerwall Inc (OUTR), continues to improve as there have been further developments this week in the U.S. District Court case regarding the amount banks can charge for debit card transactions. As reported in the Wall Street Journal, at a hearing on August 14, Judge Richard Leon insisted that the Fed needs to move quickly to rewrite the rule determining debit card fees.
In addition to lower debit fees in the future, the Judge's words introduced for the first time the possibility that retailers would actually be able to claw back fees that were collected but shouldn't have been since the Durbin Amendment was enacted.
Timing Appears Imminent
The urgency of putting a plan in place to reduce debit fees was clear as the previously referenced piece in the Wall Street Journal quoted the Judge "saying the central bank's decision makers 'can come back from Nantucket, come back from wherever they are on vacation, they can come into the board room and make a decision.'"
A status conference has been set for August 21, at 2pm to determine next steps.
Windfall Reimbursement for Past Overpayment Possible
In a Seeking Alpha article earlier this week, I calculated how bringing debit card fees down to pre-Durbin rates could result in increased EBIT of $70 million annually for OUTR.
Now the possibility that Outerwall could be reimbursed for excessive debit card fees paid over the past year and a half could translate into a one-time windfall of approximately $110 million. This assumes Redbox revenue for full calendar year 2012 and Q1-Q3 2013 (the affected period) of approximately $3.3 billion, an average ticket of $3 (implying 1.1 billion transactions), and $.10 savings per transaction.
Soros Takes Position While Shorts Have Started to Cover
With Wednesday's 13F filing showing Soros Fund Management Holdings LLC established a $26.4 million position in OUTR during Q2 and a diminished but still healthy short interest of 34.4% (down from 40+%), OUTR remains a controversial and volatile play with potential explosive upside.
Additional disclosure: I am long call options on OUTR.