Financial statement analysis of Red Box company
|Topics:||💵 Finance, Business Ethics, Marketing, 💸 Accounting, 💰 Capitalism, 💳 Microeconomics|
Table of Contents
In the last few years, the world has experienced significant growth in technological innovations, which are allowing human beings to work towards satisfying their need for convenience. Technology innovation has impacted each and every sector including the entertainment industry. Today, the entertainment industry is experiencing major evolvement, due to the adoption of technologies hence making the industry more user-friendly. The development in technology has resulted in the different option of viewing being introduced in the entertainment sector, including online streaming technology which is offered by companies such as Red Box. The entertainment industry has increasing experienced new entrants, hence making the industry one of the most competitive segments of the entertainment industry. Therefore, the purpose of this paper is to analyze the financial statement of one of the today’s major players in the streaming technology. Financial statement analysis is defined as the process of reviewing and evaluating the financial statement of a corporation inclusive of the balance sheet and income statement, hence offering the opportunity to gain a clear understanding of the company’s financial health, hence enable effectiveness in decision making. Red Box Company is an easy way to acquire and watch DVDs, Blue Ray Discs, and Video Games through their automated kiosks that are located selectively new grocery stores, fast food restaurants, and other stores. The paper will discuss the short-term liquidity of Red Box Company using the company’s financial ratios, the operating efficiency of the company, capital structure, and profitability of the firm.
Red Box Company Background
Red Box is one of the fastest growing DVD/Blue Ray rental company in the United States. The company is renting their DVD/Blue Ray by placing their kiosk machine conveniently in areas experiencing high traffic. The company was started in 202 when the first Red Box kiosk was opened by McDonald’s. Later, the company was purchased by Coinstar Inc. and over the years when the company has been operating, it has managed to rent more than one billion movies growing to more than 28, 000 locations in restaurants, pharmacies, grocery stores, and other convenience stores countrywide. Red Box business has proved to be unique were due to the demand of the DVD/Blue Ray, the kiosks have acted as a major way of increasing traffic in businesses with the kiosks, hence reducing resistance from the convenience store owners because of it a win-win situation (Sunderland, 2013). The Red Box main target is the busy people, especially young working population, who do not have time to go to Blockbusters or log in to Netflix to find a movie. Their kiosks are strategically located in most common shopping locations, hence making it easy to lead themselves to ‘lazy’ consumers. Also, the company has shown major interest on the casual movie watchers, who may not be looking for a movie but finding a place to acquire one may make him or she want to buy one. Today, Red Box has the largest DVD rental chain globally, and this has been due to their marketing mix which is clever, simple, and unique. Additionally, the company has benefited from the ever-increasing demand for DVD/Blue Ray in the United States, compared to 1977 when Magnetic Video opened their first rental store in Las Angeles, California.
In the 1970s and 1980s when the first home video systems were launched in the market, people did not have a chance to watch their favorite films, without depending on the cable TV or broadcast schedule while at home. However, due to the growth in technology, the industry has experienced significant growth, where stores have been created which brings the movies to the customers waiting to watch them. The rental video store experienced a major boom during the 1980s due to the change in social factors, and advancement of the film industry in the United States and other parts of the world. By 1995, Blockbusters was the world largest retail rental video chain, with more than 4, 500 stores in different parts of the country (Westbrook, 2016). The company managed to make millions of dollars in rental and late fees due to overdue rentals, where their customers were not given any additional product hence creating major inconveniences for their customers.
In the mid-1900s, companies such as Blockbusters and others which owned retail video rental outlets were faced with major challenges in their business model due to the wave of innovations. There was an increase in access to the internet where new rental opportunities were created, and lastly, technological innovation got extreme resulting to development in streaming technologies which have impacted the retail video rental industry negatively. The technological innovations made films available for download directly to computers in early 2000, hence changing the business model where demand for physical objects decreased significantly. Due to lack of demand for physical inventory, brick and mortar video stores ended but the demand was still high. During this time, companies such as Netflix emerged making an annual revenue of $1.2 billion in 2007, sending Blockbusters, and other companies operating in the retail video rental industry bankrupt (Lew, 2013). However, with the emergence of the McDonald’s convince stores video rental, the Red Box Company has managed to maximize the growing demand for DVD/Blue Ray videos. Over the years, Red Box has also managed to purchase their only competitors Blockbusters for about $100 million, making the company the leader in retain video rental industry.
When Red Box Company was established, the original kiosks sold different products using the name Ticktok Easy Shop. However, in 2003, the company changed the nature of business from grocery versus retail video rental stores to kiosks for DVD rentals. The company has managed to change their different elements including the rentals until the company decided to land on the one dollar per day pricing which has managed to continue through the existence of the company. The company has more than 36, 000 self-service kiosks Owned by the Outer wall, which is also the owner of Coinstar. The company has been experiencing major growth not on in market share, but also in terms of revenue, a study conducted in 2013 indicated that more than 30% of the united states citizens are still using DVD when watching films because they do not have broadband hence making the Red Box one day rental the most convenience and cost-effective. however, the company experienced a significant drop in their revenue in the fourth quarter of 2017, where it dropped by 17% to about US$407 million due to plunging of movie rental by about 24% during that year. Some of these challenges have forced the company to start removing some of their nonperforming kiosks with 2017 experiencing the highest number of kiosks removed, although they are also increasing their kiosks in areas where they never existed (Thompson, 2013). In 2013, Red Box experienced the highest revenue, where the company made about 772.9 million rentals, followed with a major drop in the following year, and the company has continued to experience the drop to 517.6 rentals in 2017. The decline is being experienced due to the changes in DVD demand for both rental and sales in the United States, where the DV rental today is at US$5.4 billion, compared to 2015 when the United States filmed entertainment industry was experiencing US$6.4 billion in revenue.
Outlook for the Future
Red Box business model has enabled the company to grow in a time when a huge number of die-hard film fun is shifting to online streaming. The future of Red Box seems promising because, there are still many spots existing today, that can be great when a Red Box kiosk available, but the company has not started franchising their machines. This means that regardless of Red Box creating a strong brand name, they do not make any profit from the franchise, which would be a major source of revenue for the company. Using this opportunity, the company can also increase their revenue through the sale of load machines which are costing between $20, 000 and 25, 000. As a franchise, the company would make a huge profit in future where the business owners would need to rent 21, 000 DVD at $1.2 to pay off the cost of the machine, and the initial inventory (Westbrook, 2016). Red Box analysis has indicated that the company is making $3, 500 per month, with the monthly overhead expected to increase due to the latest deals between Red Box and film companies including 21st Century, Universal among others.
The Short-Term Liquidity of Red Box Company
Short-term liquidity is the financial ratios that are intended to offer information regarding the firm’s liquidity or solvency over a short period. Therefore, Red Box short-term liquidity is the measure of the corporation’s capacity to encounter short-term goals of payment of obligations, without exposing the organization to any financial stress. For Red Box Company analysis, the research will concentrate on current liabilities and current assets. The ratios will be based on the short-term creditors, in the attempt of understanding whether borrowing company is able to achieve its short-term obligations including bills and loans.
Current Ratio is a liquidity measure or a measure of short-term solvency, which relate Red Box current liabilities with the current assets. The ratio helps measure short-term liquidity simply because the company current liabilities and assets are converted into cash at the end of company year. Therefore, using the ratio to understand Red Box financial stability to pay their current ration, we will divide the current assets with the current liability (Lew, 2013). According to the Red Box 2017 financial statement, the company has, a current ratio of 1.6 in times, meaning the company has the ability to pay all its financial obligations. Additionally, the current ratio is slightly higher than 2016 where the company had 1.56 times meaning the company financial stability is better.
A quick ratio is a financial ratio originally derived from the current ratio, through omitting inventory from current assets. At Red Box, inventory is the least liquid asset can be converted to cash and become a cost including below market clearance price and time. For example, the Red Box rental kiosks are large inventories and can be seen as an indication of short-term troubles. This is because; the company has tied up some considerable section of their liquidity in inventory that is staked up. Using the quick ratio, it is clear that Red Box financial stability is better; hence, the company has the ability to pay their current liabilities even after deducting their inventories and prepaid expenses. The Red Box quick ratio is 1.62, based on the 2017 financial year, as compared to 1.3 in times in the previous financial year. According to Red Box financial statement, the company received $350 million in 2013 from certain subsidiaries as principal amount, with an interest of 6.0% payable by 2021 (Sunderland, 2013). From the loan, the company was able to utilize $343.8 as net expenses, with the largest percentage being allocated to debt discount and deferred financing feed depending on their nature.
The Operating Efficiency of Red Box Company
One of the main goals of Red Box is to continue managing their profit. One of the measures being deployed by the company to continue their profitability is an improvement of efficiency in their kiosk operations. At Red Box, equipment and properties are stated at cost, which is the net of depreciation accumulated. Some of the other ways the company establishes efficiency in the organization are by ensuring expenditures that increase the capability extend the life and improve the efficiency of the equipment and property are well capitalized while incurring the expenses resulting from the maintenance and repairs. Additionally, using working capital, Red Box has managed to maintain the efficiency levels of both their assets and liabilities hence contributing to improved earnings. Red Box has managed to create operating efficiency by ensuring they have few employees (Westbrook, 2016). Red Box kiosks allow the consumers to rent films and pay using the touch screen meaning the company does not incur any cost due to rental kiosk attendants. Therefore, the company has managed to create a competitive advantage using efficiency where the cost saved in operation is shared among the customers by reducing the cost of rental compared to other companies offering similar services. Lastly, operating efficiency at Red Box was further achieved in 2016, when the company started using automated in-mold labeling technology for the decoration of their kiosks. The technology enabled the company to produce parts of the kiosks at lower cost, and ensure it has better quality and better throughput.
The Capital Structure of Red Box Company
Capital Structure is the amount of capital that is employed by a given organization to fund its operations and to finance its assets. In the last few years, Red Box has been facing questions regarding the capital structure that they should use to maintain shareholders wealth, and at the same time ensure they maintain their strong financial performance in future. In 2010, Red Box revolving credit facility was expected to mature in 2012, including the buyback program and some of their senior convertible notes. However, the company has faced major challenges to achieving the expansion because the company reached an inflection point in 2010, resulting to 10% decline in their installations, while 2011 experienced another 20% decline in company installations of rental kiosks. When it comes to the Red Box balance sheet, it has major uncertainties on what the best optimal capital structure to ensure forward growth and maximization of shareholders wealth, while ensuring a strong future financial performance is maintained (Sunderland, 2013). There are several implications being considered by Red Box when deciding on their capital structure including the effects of the rating agencies, the cost of capital, some of the key financial ratios that will be affected, and the combined effect the decisions will have on the shareholders. Having effective capital structure will help the organization during the process of redefining their existing debts, market investors, and lenders because they will be more concerned with the appropriateness of the company’s capital structure.
The Profitability of Red Box Company
It is a certainty that currently, the number of customers renting movies and video games is declining significantly, and in future, which may be even five years or ten years from now, the largest population of the United States will be connected to broadband. Therefore, Red Box needs to not only focus on profitability but ensuring they are managing the decline in rental movie consumers effectively. Currently, Red Box is making huge profits from their rental of DVDs, with the greatest percentage of the profits originating from the rental of new release after the agreements with world top movie production companies. Currently, the company is experiencing today decline in profitability and this is seen wherein the fourth quarter of 2015, Red Box recorded 17% decline in revenue, to $407 million as the movie rentals dropped by 24% in the United States (Lew, 2013). However, to ensure the company is profitable, the RedBox management has been undertaking expansion measures and increase in daily rental rates for the standard DVDs with the rates moving from $1.2 to $1.5 in December 2014. The move managed to increase the company profitability with at least 21% in the following year, but the number of installations declined.
Conclusion and Recommendations
From the financial statement analysis, it is clear that Redbox is currently operating in a market which is experiencing decline stage. Although the companies short-term liquidity, operating efficiency, capital structure, and profitability according to the financial statement is better, there is a need for the company to consider changing their products mix as a way of ensuring effective changes are in place to go ahead and get a curve. Due to the nature of business and changes in technology, I would recommend RedBox to consider venturing into offering online video games services in their rental kiosks. Also, the company needs to venture into online streaming with is the next trend in the rental video industry, by ensuring their customers can get access to their video from the comfort of their homes, after buying their movies at the Redbox rental kiosks. Lastly, the company needs to commercialize their brand name, through franchising. Currently, so many people would like to have a Redbox rental kiosk in their businesses, but RedBox cannot manage to install all the kiosks were needed in the United States.
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