Redbox’s Surprisingly Weak Q4 Sales Send Outerwall Shares Plummeting

Outerwall shares are down more than 22% this morning — a loss of $286.4 million in market value — after it told investors that its Redbox kiosk DVD-rental service will fall short of Q4 financial expectations.

It’s “challenged by the historically low box office during the third quarter, which was the worst theatrical box office in Redbox kiosks in four years,” the company says. It adds, though, that the service “is committed to taking the necessary actions to build upon its strong brand and foundation and position the business for continued success.”

The company says that Redbox now could end 2015 generating as much as $1.765 billion in revenue — down 2.8% from the forecast it offered in late October.

The problem? The firm “increased kiosk inventory in Q4 in order to improve customer engagement, hoping to drive higher volumes by improving quantity and quality,” Wedbush Securities’ Michael Pachter says. But Redbox “misjudged demand.”

Still, he lowered his price target for Outerwall shares to $59 from $100. (They touched a low of $44.50 today.) Amazon and Apple, among other companies, have “cannibalized a large portion of Redbox traffic from its convenience-oriented customers,” the analyst says.

Even so, he expects value-conscious consumers — who like its $1.50 a day rental fee for DVDs and $2 for Blu-ray discs — to remain loyal as long as it remains a lot cheaper than other VOD offerings. “Only time will tell if this is likely,” he says.

B. Riley’s Eric Wold is more optimistic — upgrading his recommendation to “buy” even though he lowered his price target for the stock by 17.1% to $58.

Today’s drop in Outerwall’s stock price is “an overreaction to a company that still dominates this market and has numerous levers to manage [free cash flow],” he says.

What’s more, he says that the stock drop could attract activist investors or buyout offers. “While there remains secular pressure on the physical rental industry, Redbox remains the undisputed leader of the space and the cash flow generation even under these conditions remains impressive.”

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