Rental nights per Redbox kiosk declined 19% year over year in Q2, which was worse than estimates.
"Rental volume is more likely to decelerate than stabilize going forward," Pacific Crest Securities analyst Andy Hargreaves said in a research report Thursday. "All previous physical (media) formats that we have data on have shown a similar pattern of accelerating declines as they age. We expect DVD to be similar."
Hargreaves rates Outerwall stock underweight, with a fair value of 46.
Despite an increase in pricing, Redbox's Q2 revenue fell 1%, as rentals per kiosk dropped 8.9%, marking the fifth consecutive quarter of declines, Dougherty analyst Steven Frankel said in a report Friday. Frankel rates Outerwall stock as neutral.
The third quarter is looking particularly weak for Redbox, given an underwhelming slate of new movie releases.
With a third-quarter (ending Sept. 30) box office projected to be 46% lower in revenue than the prior-year period, including eight fewer theatrical releases, Redbox is expecting a negative impact on its current Q3 financials, Galen Smith, CFO of parent Outerwall, said on the kiosk vendor’s July 30 fiscal call.
Redbox generates the bulk of its revenue from new releases, with box office revenues from $25 million to $100 million each. Smith said the months of August and September are tracking to be “very light” on new releases, with just seven new titles each month.
Indeed, the executive warned that major box office titles released in Q4 typically are earmarked for sellthrough — not rental.
“So, you can have a very big box office, and yet it doesn’t generate a lot of rentals. Really that sweet spot is the movie, comedy or action, with a box office from $25 million to $100 million,” Smith said.
With studios pushing back theatrical releases this year due to market conditions, the impact on subsequent new-release disc rentals typically results in 8% to 12% fewer rentals, according to the CFO.
“The Q3 box office is looking particularly weak. It’s the lowest box office that I can remember in a long time. It’s important to note that Q3 is expected to be our lowest quarter of the year from a Redbox perspective,” he said.
Meanwhile, following a 13% drop in rental transactions in the second quarter, Smith said Redbox management is analyzing whether price hikes implemented in Q4 last year will create increased rental volatility over time.
The CFO said the trend could see consumers returning to previous rental activity levels or scaling back further, especially on direct-to-video titles.
“The movies are enjoyable and fun to watch. It’s just how do we help educate the consumers that it’s worth that expense. That is something we will continue to monitor throughout the year,” Smith said.