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Coinstar Inc. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: February 9, 2012 10:57PM
Coinstar Inc. (CSTR) filed Annual Report for the period ended 2011-12-31. Coinstar Inc. has a market cap of $1.77 billion; its shares were traded at around $57.31 with a P/E ratio of 17.4 and P/S ratio of 1.3. Coinstar Inc. had an annual average earning growth of 17% over the past 10 years. GuruFocus rated Coinstar Inc. the business predictability rank of 4-star.
Highlight of Business Operations:We have historically experienced seasonality in our revenue from our Redbox segment. The summer months have historically been high rental months followed by lower revenue in September and October, due, in part, to the beginning of the school year and the introduction of the new television season. However, we have recently entered into licensing agreements with certain studios that contain delayed rental windows. This has shifted the availability of certain titles relative to historic patterns, most notably certain titles have shifted from the fourth quarter holiday season into the first quarter of the following year. Despite this shift, for 2012, we expect our highest quarterly revenue and earnings in the fourth quarter, however, any seasonal affects may be minimized by the relative attractiveness of movie titles in a particular quarter or year. Our Coin segment generally experiences its highest revenue in the second half of the year due to increased retailer foot traffic and holiday shopping in the fourth quarter and an increase in consumers desire for disposable income in the summer months.
We do a substantial amount of our business with certain retailers. For example, we have significant relationships with Wal-Mart Stores, Inc., Walgreen Co., and The Kroger Company, which accounted for approximately 17.5%, 16.0%, and 11.2% of our consolidated revenue from continuing operations, respectively, during 2011. Although we have had, and expect to continue to have, a successful relationship with these retailers, changes to these relationships will continue to occur both in the long- and short-term, some of which could adversely affect our business and reputation. For example, our Coin and Redbox relationship with Walmart is governed by contracts that provide either party the right to terminate the contracts in their entirety, or as to any store serviced by the contracts, with or without cause, on as little as 90 days notice. Cancellation, adverse renegotiation of or other changes to these relationships could seriously harm our business and reputation.
We face ongoing pricing pressure from our retailers to increase the service fees we pay to them on our products and services or to make other financial concessions to win or retain their business. If we are unable to respond effectively to ongoing pricing-related pressures, we may fail to win or retain certain accounts. Our fee arrangements are based on our evaluation of unique factors with each retailer, such as total revenue, long-term, non-cancelable contracts, installation of our kiosks in high-traffic, urban or rural locations and new product and service commitments. Together with other factors, an increase in service fees paid, or other financial concessions made, to our retailers could significantly increase our direct operating expenses in future periods and harm our business. In addition, we accept payment for DVD and game rentals through debit and credit card transactions. For these payments, we pay interchange and other fees, which have increased and may increase further over time. Further, because Redbox processes millions of small dollar amount transactions, and interchange fees represent a larger percentage of card processing costs compared to a typical retailer, we are relatively more susceptible to any fee increase. When interchange or other fees increase, it generally raises our operating costs and lowers our profit margins or requires that we charge our customers more for our products and services.
$274.4 million increase in direct operating expenses attributable to revenue growth, including higher than optimal DVD product costs related to purchases of December 2010 and January 2011 titles, as well as increased game product costs in support of our national video game rollout in June 2011, increased revenue share and payment card processing fees and increased kiosk field operations expenses. Partially offsetting these increases were extensions of the DVD license amortization periods from 26 weeks to 52 weeks for certain studios due to amended agreements and lower restricted stock expense due to a lower market price of our common stock on the last day of the calculation period when compared to the prior period. As our installed kiosk base grows, we continue to better utilize our existing field resources and lower the servicing costs per kiosk. Direct operating expenses as a percent of revenue for 2011 was 72.6%, down 1.5 percentage points from 74.1% in 2010;
$274.6 million increase in direct operating expenses attributable to the revenue growth, which was primarily due to higher DVD and game product costs, revenue share and payment card processing fees and increased kiosk field operations expenses, as well as increased restricted stock expense due to a higher market price of our common stock on the last day of the period when compared to the prior period. As our installed kiosk base continues to increase, we are able to better utilize our existing field resources and lower the servicing costs per kiosk. As a percent of revenue, direct operating expenses decreased 1.6 percentage points to 74.1% in 2010 from 75.7% in 2009;
Stocks Discussed: CSTR,