Coinstar, Inc. (CSTR) Has a Problem

Coinstar, Inc. (NASDAQ:CSTR) may be the last remaining player to be growing in the fading art of DVD rentals, but that may not last too much longer.

Shares of the Redbox parent tumbled on Thursday night after posting mixed quarterly results.

Revenue climbed 8% to $564.1 million, well short of the $580.2 million that Wall Street was targeting. The bottom line held up better relative to expectations. Yes, net income, operating profits, and free cash flow all fell during the period, but the $0.75 a share that Coinstar posted in continuing earnings — or $0.93 a share once you back out the operating loss from its recently acquired NCR Corporation (NYSE:NCR) kiosks — landed ahead of the $0.73 a share that analysts were forecasting.

Don’t read too much into the big hit from the 6,200 Blockbuster Express kiosks that Coinstar acquired last year. NCR makes ATMs, folks. It wouldn’t have sold its flick-spewing automatons if money was flowing in the right direction in that business. The real problem here is Coinstar’s dwindling revenue growth.

Redbox fades to black
The average Redbox rental rose from $2.52 during the holiday quarter of 2011 to just $2.57 this time around. Keep in mind that Redbox rolled out a 20% price increase at the end of October last year. The company has also seen its pricier Blu-ray rentals double over the past year. Shouldn’t we have expected more than just a 2% increase in the value per rental?

There are two reasons for the slip. One problem is that video game rentals made up a smaller part of the revenue mix this time around. That isn’t a surprise. Anyone who has seen video game retailer Game Stop Corp. (NYSE:GME) slash its same-store sales guidance four times over the past year could’ve seen this coming. The video game industry has been in a funk for years. This is only going to get worse, especially if reports that the new Xbox won’t accept rentals prove accurate.

The other problem is that folks are simply returning their rentals sooner. This is scarier than you probably think. If Redbox finds that more of its customers are returning their discs the next day — instead of paying $1.20 a night for every additional night — it probably means that the kiosks are losing their more affluent customers. Redbox’s value proposition has always brought out the penny-pinchers who don’t want to spring $5 for a pay-per-view rental from the comfort of their living room Barcalounger, but now it may be down the stingiest of movie buffs.

Digital tries to save the day
Sure, bulls will argue that Redbox Instant by Verizon (NYSE:VZ) — the video service that Verizon Communications Inc. (NYSE:VZ) and Coinstar introduced in beta and plan to roll out commercially by next month — will help. Redbox will finally take on Netflix, Inc. (NASDAQ:NFLX) in streaming, readying Redbox for the inevitable decline in DVD renters that Netflix and Blockbuster have been experiencing for a couple of years now.

We’ll have to see how that all plays out.