Newsletter: Winter Olympics Cut Into Retail Demand

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Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):

O 2/18: Machete Kills ($8)

O 2/25: Thor: The Dark World ($206), Nebraska ($17)

Key Redbox releases last year (with domestic box of fice total in millions from www.boxofficemojo.com):

O 2/19: Sinister ($48), End of Watch ($41), Fun Size ($9)

O 2/26: Silent Hill: Revelation 3D ($18), The Master ($16)

Over the next two weeks, there is one rental release that grossed over $50 million in domestic box off ice compared to four last year. DVD rentals for the upcoming two-week period should underperform the same period last year.

Outerwall (NASDAQ:OUTR) announced a share repurchase program that is expected to result in significant earnings accr etion in 2014. The $350 million buyback is likely to reduce diluted shares outstanding to around 21 million from last year’s 28 million, or over 20 percent. We expect the company to generate over $200 million in free cash flow in FY:14 and spend another $150 million repurchasing stock, further reducing share count.

Outerwall has cut costs by $22 million and has curtailed new venture spending, which should allow for solid profit growth in 2014, notwithstanding guidance for declining year-over-year net income on higher revenues. At its analyst event last week, Outerwall reiterated its intention to invest in its ecoATM business, and to continue a limited investment in SAMPLEit ($1samples in drug stores), with ecoATM accretive to EPS by the end of 2014. Outerwall added $350 million of debt to fund share repurchases, moving to its target net leverage range of 1.75 – 2.25x net debt-to-core adjusted EBITDA in Q1:14.

The popularity of the Winter Olympics may have cut into rental demand during the middle part of the quarter. Management’s guidance for Q1 revenue is modestly above last year ’s level, implying that the impact will not be severe, and management did not comment on guidance at its analyst event last week. At the midpoint, EPS guidance is below last year’s level, in part due to differences in amortization. However, EPS guidance does not take the $350 million share repurchase into account, and we expect Outerwall to have an average of 23.4 million shares outstanding for Q1, compared to 28.9 million last year, suggesting significant upside to guidance and consensus estimates. We think Q1 upside from the share repurchase will serve as a catalyst for Outerwall shares.

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