Outerwall CEO J. Scott Di Valerio has stepped down, less than two years being in-charge of his position. Nora Denzel, one of Outerwall’s board members, has been appointed interim CEO. The company announced that it has started an immediate search for a permanent successor to Di Valerio as CEO. Company shares fell 20% to $62.05.
Outerwall is a leading provider of automated retail solutions that offers Redbox self-service kiosk, through which consumers can rent or purchase movies and video games., and Coinstar business, through which consumers can convert their coin to cash or stored value products at self-service coin counting kiosks.
Outerwall announced in December 2013 that it plans to discontinue its non-core operations such as Rubi, Crisp Market, and Star Studio businesses which resulted in approximately $22 million of annual cost savings beginning in the first quarter of fiscal 2014.
Those Who Don’t Innovate, Will Not Operate
Apart from mail delivery and online retailers like Netflix and Amazon, Outerwall’s Redbox sees competition from other forms of movie content providers, including Apple’s (AAPL) iTunes, Google’s (GOOG) YouTube, and Hulu. Redbox competitors also include cable, satellite, and telecommunications providers, like Comcast (CMCSA) and DISH Network (DISH).
To fight off the declining market share as a result of online streaming service, Outerwall announced a price increase for Redbox rentals in December, 2014. This move will keep revenues afloat in the short term, but will not change the underlying trend. The industry is innovating into online streaming. To prove this point, look no further than Netflix’s latest release, in which the company disclosed 4.3M new subscribers in Q4. That’s a potential 4.3M individuals that have made the move to watching online.
It is difficult to predict how long it is going to take the DVD business to decline, but the company generates a ton of cash flow. This is a primary reason why $350 million of share buybacks in early 2014 were made – to return money back to shareholders. Outerwall has become a shareholder friendly company with management announcing that 75-100% of cash flows will be returned to shareholders. This is great and all, but how about reinvesting these funds into potential growth avenues?
Valuation wise, Outerwall could be viewed as a cheap equity. The company trades at 16x trailing P/E, 7.8x forward P/E and a 0.62 P/S. There is a reason for this. Outerwall is a value trap. A company that missed the boat and on the verge of undergoing a slow death. It’s only a matter of time before the effects of the price increase and declining market share are spilled over into financials.