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Redbox Looking to Work Through Challenges

The DVD rental kiosk operator is addressing fourth-quarter inventory problems and faces a possible push by Time Warner to lengthen the delay with which it gets product.

NEW YORK -- DVD rental kiosk operator Redbox has started taken measures to address issues that caused its fourth-quarter results to underperform.

Paul Davis, CEO of Redbox parent company Coinstar, told analysts on a Thursday earnings conference call that the company remains comfortable with the 28-day delay with which it gets DVDs from several studios, even though the delay caused holiday season results to fall short of expectations.

However, the company's measures are designed to optimize inventory in its rental kiosks after weaker-than-hoped fourth-quarter consumer demand created inventory impasses.

Asked about the possible impact of a lengthening of the 28-day window as suggested Wednesday by Time Warner CEO Jeff Bewkes, Davis said Redbox's studio partners mostly seem pleased with the window, the company is "very pleased" with its studio relationships, and it has long-term product contracts. For example, its deal with Warner runs through this year, the company said. If the window ends up getting extended too far, "we can always go back to the workaround," Davis said.

That "workaround" consists of the company going out and buying copies of movies at retail stores. However, some big retailers have limited the number of copies of each title that people can buy to avoid mass purchases, which means that Redbox may not always get enough copies of movies.

Meanwhile, the DVD rental kiosk firm is working to address its holiday season problems. For example, Redbox is adjusting inventory to account for a slower-than-expected uptake of Blu-ray by its users and devising new systems to react more quickly when title imbalances occur when more people return DVDs to locations that they didn't rent them from. Management said that in the fourth quarter more than 40 percent of product ended up being returned to different kiosks. That caused some kiosks to have too many or too few copies of certain films, which in turn led to a lower-than-expected average number of rented DVDs.

The measures to address the issues will only fully kick in around the end of the current first quarter or start of the second quarter, management said as Coinstar provided a first-quarter outlook that included a profit estimate that fell short of Wall Street expectations. Coinstar shares fell in after-hours after already seeing a big decline when it recently warned about its fourth-quarter results.

For the current quarter, Coinstar told investors it would generate $400 million-$420 million in revenue and a profit of 15 cents-25 cents per share.

The first quarter looks weaker than the rest of the year for Redbox due to remaining inventory  challenges and the fact that Easter last year fell into the first quarter, but is this year part of the second quarter, executives said.

For the full year 2011, Coinstar said it expects Redbox to record revenue of $1.42 billion-$1.56 billion.

Management on Thursday also reiterated that it is in "deep" discussions with possible partners for a Redbox-branded streaming video service, which would compete with Netflix, that it still plans to roll out some time this year.

The company didn't provide new details on possible partners or prices for the service.

Redbox will also decide on the broader rollout of a video game rental service that it has been offering in some areas in the coming quarters, the companies said.