It’s painful to see a company that looked so promising slow down so quickly. What’s even more painful is watching management try to explain how they are going to grow in the future, when everyone knows the numbers don’t add up. This is the situation at Coinstar, Inc. (NASDAQ:CSTR). The company has a few choices to try and get their stock moving again, but at present they aren’t making either choice.
Would Peter Lynch like this company?
Peter Lynch used to say that he looked for companies that operated in slow growing businesses, where they could take more market share. He tried to avoid exciting businesses, because there is no excitement in watching your stock go down due to competitive pressures.
It seems like Coinstar, Inc. (NASDAQ:CSTR) is tailor made for Mr. Lynch. The company’s Redbox kiosks compete in an area that seemingly no one wants. Netflix, Inc. (NASDAQ:NFLX) essentially killed off Coinstar’s main competitors with their original disc by mail business. Amazon.com, Inc. (NASDAQ:AMZN) is trying to spoil Netflix, Inc. (NASDAQ:NFLX)’s fun by adding thousands of streaming videos to Amazon.com, Inc. (NASDAQ:AMZN) Prime. Not to be outdone, Coinstar teamed up with Verizon Communications Inc. (NYSE:VZ) to offer Redbox Instant. However, the core of Coinstar’s business is the Redbox kiosk and their green Coinstar, Inc. (NASDAQ:CSTR) counting machines.
There is the problem
The Redbox concept seemed poised to grow its kiosk count for years, but the company put the brakes on that theory last year. With over 40,000 kiosks, the company believes it is approaching saturation. In the past, it wasn’t unusual to see several hundred new kiosks being opened, in the last three months, the company opened a net of just 30 locations.
Last year, Redbox benefited from a decline in Netflix, Inc. (NASDAQ:NFLX)’s DVD customer base. Netflix went from over 10 million DVD subscribers last year, to under 8 million in the current quarter. Redbox also managed to push through a 20% rate increase without anyone noticing, and same-store sales were up. However, those trends are going away, and Redbox’s same-store sales were down a jaw dropping 11.8% in the current quarter.
While fans of the company would point to the company’s New Ventures as the division that will drive future growth, the numbers simply don’t support this theory. At current, Redbox represents 88.38% of Coinstar’s revenues at over $500 million. By contrast, New Ventures only has revenues of $1.3 million.