DEEP ANALYSIS: Movie Rental Business Update

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between July 30 and August 12, including notable rental releases, box office figures and recent company-specific news.

Movie Rental Industry

Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):

o 8/2: Wanderlust ($17).

o 8/7: American Reunion ($57).

Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):

o 8/2: Soul Surfer ($44).

o 8/9: Jumping the Broom ($37), Arthur ($33), Mars Needs Moms ($21).

*estimated release date

Over the next two weeks, there are two notable rental releases compared to none last year, classifying notable releases as those that grossed over $50 million in domestic box office. We expect the upcoming two-week period to outperform the same period last year, as The Hunger Games (NYSE:LGF) will likely draw incremental rental activity over last year.

Coinstar (NASDAQ:CSTR) recently reported mixed earnings, with revenue below expectations and EPS above, Coinstar raised FY:12 guidance $0.10 on the high end net of a $0.40 – 0.50 impact from its NCR acquisition. Unfortunately, the NCR impact was somewhat confusing, sending Coinstar shares sharply lower after its report. Guidance implies that earnings will decline sequentially each quarter this year. Also, details regarding the structure of Redbox’s JV with Verizon are still forthcoming.

Netflix (NASDAQ:NFLX) recently reported mixed earnings, with in-line revenue and a large EPS beat, Netflix cleared up any lingering confusion about its earnings prospects – it plans to operate at break-even for the foreseeable future as it expands internationally. We expect shares to continue to trend down, as we believe investors disappointed in Q2 domestic subscriber additions will again be disappointed in 2H domestic subscriber additions given unrealistic guidance. Netflix’s lack of concern about profit as it focuses on international expansion makes valuation difficult. In our view, consensus estimates remain too high.

Exhibitor Industry

Domestic box office was down 7.5% in July. According to boxofficemojo.com, domestic box office results for July declined 7.5% compared to our estimate for a 2% increase. July began well with late June releases performing above expectations, including Ted, which earned $157 million in July, Brave, which earned $98 million in July, and Magic Mike, which earned $78 million during July (of its $112 million total box office run). Early July releases performed in line with expectations, including The Amazing Spider-Man ($244 million) released on July 3, and Ice Age: Continental Drift ($119 million) released on July 13.

The Dark Knight Rises (NYSE:TWX) was expected to be the standout summer blockbuster, but its success has been somewhat muted after the tragic events on its opening night. While we acknowledge the Colorado incident has certainly had an impact on ticket sales for TDKR, we believe that it may have a longer box office run as a result. Should we be wrong, and people are content to stay away and watch in the safety of their homes during the rental window, Redbox will be a clear beneficiary.

We believe the Olympics have been the primary distraction during Q3, impacting quarter-to-date box office receipts. We note that in our most recent bi-weekly report, Q3 quarter-to-date box office was flat year-over-year. This includes the releases of TDKR and The Amazing Spider-Man (NYSE:SNE) compared to difficult comparisons from Harry Potter and the Deathly Hallows Part 2 and Transformers: Dark of the Moon, both released the year prior. Box office receipts really began trending down yearover-year as the Olympics started on Friday, July 27.

August month-to-date is trending down 8.0% apparently due to the cannibalization from the Olympics. We expect moviegoers to head back to the theaters this week, now that the Olympics have concluded. While we are expecting the month to end down year-over-year, we do expect a lift in the second half of the month due to pent up demand and easier comparisons given the release slate during August last year. As of Friday, month-to-date receipts were trending down 27.6%, indicating that people have already begun to return to the theaters after having spent enough time watching the Olympics.

Quarter-to-date domestic box office is trending down 6.2%, but we expect it to progressively improve over the remainder of the quarter as the Olympics end, pent  up demand drives higher receipts, and a decent release slate compares favorably to the same period last year.

Michael Pachter is an analyst at Wedbush Securities.