Outerwall Inc. - OUTR - close: 56.93 change: -0.31

Stop Loss: 60.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 486 thousand
Entry on September -- at $---.--
Listed on September 30, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: Yes, see below

Company Description

Trade Description:
Technology and consumer trends are constantly growing and changing. OUTR has failed to keep up and it's business model appears to be outdated.

OUTR is part of the services sector. According to the company, "Outerwall Inc. has more than 20 years of experience creating some of the most profitable spaces for their retail partners. The company delivers breakthrough kiosk experiences that delight consumers and generate revenue for retailers. As the company that brought consumers Redbox® entertainment, Coinstar® money services, and ecoATM® electronics recycling kiosks, Outerwall is leading the next generation of automated retail and paving the way for inventive, scalable businesses. Outerwall kiosks are in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland."

The Redbox DVD kiosks business was great while it lasted. Last year the company hit their four billionth rental. Unfortunately today everything is turning digital and consumer viewing habits are moving into streaming services. I'm sure we'll see Redbox kiosks around for years but their growth is over. That's bad news for OUTR since Redbox accounts of 80.5% of their revenues.

Another challenge is OUTR's ecoATM concept. The idea is people bring their old smartphones, tablets, and other electronic gadgets to the kiosks and sell them to OUTR. OUTR then resells the used electronics. One of the biggest categories for their ecoATM business was buying and selling used Apple iPhones. Unfortunately for OUTR Apple just announced a new iPhone leasing program where consumers can get a new upgraded iPhone every year for just $32 a month. Obviously every iPhone user is not going to take advantage of Apple's new program but it will reduce the number of iPhones that end up in an ecoATM kiosk. Plus, the bigger risk is that other mobile phone makers like Samsung might follow Apple's lead and offer their own program that reduces the number of used smartphones in the after market.

The ecoATM concept was already struggling before Apple made their leasing announcement. OUTR more than doubled the number of ecoATM kiosks and yet revenues only rose +9%.

Looking at OUTR's earnings report results have been mixed. The company managed to beat estimates on the bottom line the last couple of quarters but revenues have been flat or down the last three quarters. One of the biggest reasons OUTR has been beating the top line is their aggressive stock buyback program that is reducing the number of shares.

The company's most recent earnings report was July 31st. Q2 revenues were down -0.2% to $545.4 million, which missed estimates. Earnings guidance was in-line with estimates but revenue guidance for 2015 was below Wall Street expectations. OUTR's stock collapsed on the earnings news because of the sharp slowdown in their Redbox business.

Last quarter the number of rental nights per Redbox fell -19% while rentals per kiosk dropped -8.9%. It was the fifth quarter in a row of declines for the Redbox business. Analysts believe this trend will continue for the aging business.

Technically OUTR's stock is bearish. The stock is in a bear market with a -32% drop from its July 2015 highs. OUTR has broken down below its August (market-correction) lows. The stock is also in the process of breaking down below a very key trend line of support on the long-term weekly chart (see below).

Yesterday's intraday low was $56.50. We are suggesting a trigger to launch bearish positions at $56.35. Odds are good we could see OUTR drop toward round-number support at $50.00. The point & figure chart is more bearish and forecasting at $32.00 target.

I have to caution traders that there is an elevated risk of a short squeeze. There are already a lot of bears in this trade. The most recent data listed short interest at 40% of the very small 14.5 million share float. That raises the risk of a short squeeze. Combine that with the company actively buying back stock and any significant bounce is the beginning of a potential squeeze higher. I suggest small positions to limit risk.

Trigger @ $56.35 *small positions to limit risk*

- Suggested Positions -

Buy the NOV $55 PUT (OUTR151120P55) current ask $3.50
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart: