New Coinstar Chief Executive Scott Di Valerio takes over the Bellevue-based company amid tough questions on Wall Street: Is Coinstar’s all-important Redbox movie DVD business past its prime? And can its new Rubi coffee-vending machines succeed where others have failed?
Di Valerio, who became CEO last Monday after three years as Coinstar’s chief financial officer, gives two simple answers: “No” and “Yes.”
“Our focus is to try to double the size of the company over the next five years,” he said during a recent interview at Coinstar’s headquarters near downtown Bellevue. “Innovation is important, and new ventures are going to help us get there.”
Wall Street’s worries are driven by a shift in consumer behavior from physical movie-disc rentals to digital streaming.
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Redbox, which rents new-release DVDs for $1.20 a day at self-serve kiosks, generated a whopping 86 percent of Coinstar’s $2.2 billion in revenue last year.
The Oakbrook Terrace, Ill.-based subsidiary grew 22 percent, boosted by strong demand for pricier Blu-ray discs and video games, as well as the addition of 8,300 new kiosks. But Redbox plans no more than 1,000 additional kiosks this year, stoking concerns about its growth prospects.
At the same time, Coinstar is spending up to $25 million annually on new ventures with little so far to show for it. The company reported only $2.5 million in revenue last year from new ventures, including machines that sell coffee, refurbished electronics and personalized photos.
“I’m not a big fan of some of their new ventures, and some of them make a lot of sense to me,” said analyst Michael Pachter, of Wedbush Securities in Los Angeles.
While Pachter believes Coinstar’s coffee dispensers show promise, he’s less optimistic about its new photo-booth concept, which lets customers decorate and share photos via email or Facebook.
“I think the photo idea is a bad one. Seriously, you can take a photo with your iPhone and Photoshop it on your PC,” Pachter said.
As for the CEO changeover at Coinstar, Pachter is unequivocal.
“I love Scott,” he said of Di Valerio. “He’s very bright. He understands what he’s doing, and he has a focus.”
Coinstar surprised Wall Street in January when the company announced that Di Valerio, 50, would replace Paul Davis as CEO on April 1. Coinstar said only that Davis, 56, was retiring after four years in the post.
Davis said during a short interview last month that he felt it was time to move on.
“I’m going to continue to be involved in the community, and then I’ll just look at other opportunities,” said Davis, who’s active with local nonprofit FareStart, which teaches culinary skills to homeless people.
Davis said Di Valerio will “do great” in his new role.
“Scott and I have worked side by side for three years. He’s a highly capable, talented leader, as is the rest of the team,” Davis said.
“I’ve done what I love to do,” he said. “I love reconstructing businesses, and have set the stage for many, many years of growth.”
Values of hard work
Di Valerio became Coinstar’s CFO in March 2010 after a year as president of the Americas for personal-computer maker Lenovo Group.
Di Valerio, a San Fernando Valley native, began his career at the big accounting firm PricewaterhouseCoopers in Los Angeles, where he worked with local technology and biotechnology firms. He joined Walt Disney in 2001, and from 2003 to 2007 held senior positions at Microsoft, including corporate vice president of the OEM division.
He credits his construction-worker dad for teaching him the values of hard work.
“I’ve always been under the impression that you put your head down, work hard, make the team better, and good things will come,” Di Valerio said. “My dad used to tell me — probably not as eloquently as this — do stuff you don’t like well, so you can do the stuff you like.”
His dad, a studio prop maker who eventually managed set designs for Paramount, also gave him an appreciation for Hollywood that carries over to today.
“The first show he worked on was ‘I Love Lucy,’ ” Di Valerio recalled. “It’s an interesting industry and one that does a lot of good for folks. … Working here and being able to deliver entertainment to a broader of group of people through our Redbox business is a lot of fun.”
Bets on stock
Di Valerio takes the helm at a time when many short sellers are betting Coinstar’s stock will drop. The interest in shorts, fueled by doubts over Redbox’s long-term viability, accounts for about half of Coinstar’s outstanding shares, making it one of the most heavily shorted stocks on the Nasdaq.
Coinstar stock, which closed Friday at $55.89, down 85 cents, sells for about 10 times this year’s projected earnings, a bargain compared with Netflix stock, which trades at a multiple of nearly 130 times estimated earnings.
“That’s Wall Street saying Netflix is the future and Coinstar is the past,” said analyst Blake Bos, of equity-research firm The Motley Fool.
Last month, Coinstar and partner Verizon entered the digital fray with a nationwide rollout of Redbox Instant, a new streaming service. For $8 to $9 a month, it lets customers watch older movies on TVs, tablets and smartphones, plus get four free physical discs from Redbox.
To hedge its bets, Redbox is paying for digital content on a per-subscriber basis, meaning it won’t be out lots of money if membership falls short of expectations, Bos said.
“Their objective is to push people to their DVD kiosks,” he said. “Long-term, they’re going to add a lot more to their streaming-content library to compete with Netflix and Amazon, which is extremely expensive.”
For all the worry about the demise of physical discs, Redbox remains the cheapest source of new-release movie rentals, while online subscription services offer older titles and episodic TV shows. “When people really want to see a movie, they’re coming to Redbox,” Di Valerio said.
Redbox generates about 45 percent of movie-disc rentals in the U.S. and can grab more market share, he said. He noted that Redbox is modifying its more than 43,000 kiosks to accommodate 710 discs each, up from 630, and it’s experimenting with event-ticket sales in Philadelphia and Los Angeles.
But as Redbox reaches saturation in the U.S., Di Valerio is talking up some new ideas for other vending machines.
Last June, Coinstar announced an exclusive, five-year deal with Starbucks-owned Seattle’s Best Coffee to put Rubi-branded coffee dispensers in supermarkets, drugstores and big-box outlets. The machines grind Arabica beans on demand and dispense coffee in 12- and 16-ounce cups for $1 or $1.50.
Rubi now is in a handful of U.S. markets, including Seattle, and will expand to 10 more markets by year’s end, possibly totaling about 2,000 machines, Di Valerio said.
Coinstar also is testing machines that sell cosmetic samples and such fresh foods as Caesar salad wraps and turkey sandwiches in the $6 to $8 range.
“We can’t take six years to get to scale like we did with Coinstar and Redbox,” Di Valerio said, acknowledging Wall Street’s impatience. “I think we have to cut that in half, and we should be able to do that given our relationships with retailers and our designers.”
He added that he has no problem pulling the plug on bad ideas.
“This year, I’m sure we’ll have one or two that aren’t working the way we want. They may be nice businesses,” he said. “But we’ll shut them down.”
Amy Martinez: 206-464-2923 or email@example.com.
On Twitter: @amyemartinez