Piper Jaffray Lowers Estimates & PT On Coinstar Following Q1 Outlook

Coinstar CSTR maintained FY11 guidance, but Q1 is below consensus. In Q1, continued expensing of overbought blu-ray and 28 day delay inventory will impact gross margin and, therefore, EPS, as the company works through inventory that was purchased late in Q4. While the company may not yet have good visibility on the changing dynamics of the Redbox business, Piper Jaffray believes the DVD kiosk story is not over and that kiosks will continue to gain share over the next couple of years. The inventory management issues in Q4 will continue to impact gross margin in Q1, as the company expenses overbought 28 day delay and blu-ray inventory. While the company recognized the inventory issues, DVD purchase lead times of ~8 weeks left them unable to change previously made purchase commitments.The continued expensing of overbought 28 day delay and blu-ray inventory into Q1 will negatively impact gross margin. In 2010, retail stores generated 28% of movie rental revenue, and kiosks had just 18%. But by 2014, video stores are expected to have just 11% market share. Piper believes kiosks will continue to soak up a large portion of that share, in addition to internet delivery. Piper Jaffray has a $50 PT and Overweight rating on CSTR CSTR is trading 14% lower at $38.04