Redbox: Scaling Down Financial Estimates Doesn't Change Bullish Outlook

| About: Outerwall Inc. (OUTR)

Wall Street is keeping closer tabs on Coinstar (NASDAQ:CSTR), the company behind the Redbox DVD kiosks, after the company said that it would miss its Q4 and 2011 forecasts when it reports earnings later this month.

In a statement issued yesterday, the company put the blame on three miscues:

  • The company expected better results from holiday releases.
  • The demand for new releases never really materialized.
  • Customers took the company’s “rent and return anywhere” service to heart, creating “temporary imbalances in available titles across the kiosk network.”

In other words, there was some pretty poor planning on the management side.

That’s one of the reasons that Wall Street remains bullish on Coinstar today, according to analyst notes highlighted on Barron’s Tech Trader Daily blog. This isn’t a case of the business model suddenly crumbling. This is a case of Coinstar making some bad business decisions. In a statement, Coinstar CEO Paul Davis said:

We have already taken a number of decisive steps to better align content purchases with our consumers’ behavior, including offering more day and date titles and better allocating Blu-ray titles to high demand areas. In addition, since inventory migration reflects the popularity of our rent and return anywhere capability, we have made adjustments in our field processes to minimize the impact of higher levels of migration on overall rentals. While some measures such as changes in purchasing take longer to impact financial performance, early results give us confidence that we have begun taking the right steps to address these issues and position the business for further success.

The positive outlook for the business model is helping to maintain a bullish outlook for analyst. Wedbush Securities analyst David Pachter, for example, reiterated his Outperform rating and said he thinks the miss for Q4 was due to “overly aggressive guidance.”

Piper Jaffray’s (NYSE:JFC) Michael Olson also saw the miss as a “function of inventory management," also noting that “the real question is whether the DVD kiosk story is over, and our take is that kiosks will continue to gain share over the next couple of years.”

Until streaming models take over in the new world of connected TV, DVD rentals will continue to be a brisk business, especially for those without the overhead of brick-and-mortar locations and employees to staff those stores.

Disclosure: None