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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Revenue well below expectations. Revenue was $538 million, compared with our estimate of $575 million, consensus of $561 million, and guidance of $550 – 575 million. DVD revenue was negatively impacted by Olympics viewership, a light release schedule and several weeks with little new content.
EPS was higher than expected from inventory management. EPS was $1.26 vs. our estimate of $1.25, consensus of $1.16, and guidance of $1.09 – 1.24.
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Redbox was able to deliver Q3 EPS above the high end of guidance despite another comps decline, suggesting that the company has the ability to properly manage inventory in unexpectedly difficult periods to meet or exceed earnings expectations. We are confident that Redbox can partially offset expected losses from the Verizon (NYSE:VZ) JV through inventory management, and as a result, we are leaving our FY:13 EPS estimate of $5.50 unchanged despite the lower-than-previously expected earnings that the company has guided to in Q4:12.
In order to increase traffic at its kiosks and the frequency of rentals, Redbox intends to purchase more inventory than it typically does in the fourth quarter to improve copy depth, pressuring margins and EPS, as implied by guidance. However, if foot traffic does not increase as the company speculates, revenue growth will remain challenged and profitability will suffer markedly as well.
Declining comps may signal a sustained decline in customer interest in Redbox rentals as opposed to a temporary blip. The rental decline was especially noticeable in transactions per kiosk, leading to the third consecutive quarter of lower comparable sales. It is possible that some consumers may now prefer the catalog viewing options presented by Netflix’s (NASDAQ:NFLX) content library than the individual new release rentals championed by Redbox. We expect comps to remain challenged in Q4:12 and Q1:13 as the recently-replaced NCR kiosks (not in the comp base) take share from existing Redbox kiosks in the comp base.
Maintaining our OUTPERFORM rating but lowering our 12-month price target to $66 from $88, which reflects a multiple of 12x our unchanged 2013 EPS estimate of $5.50. This is a discount to Coinstar’s (NASDAQ:CSTR) historical valuation to reflect recent rental demand declines, increasing competition for the Verizon JV offering (from Amazon and others), the negative impact of the NCR kiosk acquisition thus far, an uneven profitability outlook, and long-term technology challenges.
Michael Pachter is an analyst at Wedbush Securities.
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