Earnings Preview: GameStop

GameStop Corporation (GME), the video game and entertainment software retailer, is scheduled to report its fourth-quarter 2010 financial results on March 24, 2011. The current Zacks Consensus Estimate for the quarter is $1.56 per share. For the quarter under review, revenue is $3,710 million, according to the Zacks Consensus Estimate.

Third-Quarter 2010, a Synopsis

GameStop’s third-quarter 2010 earnings of 38 cents a share came a penny ahead of the Zacks Consensus Estimate and rose 18.8% from 32 cents earned in the prior-year quarter driven by top-line growth and effective cost management.

The Grapevine, Texas based company, GameStop, had posted total revenue of $1,899.2 million that fell short of the Zacks Consensus Estimate of $1,948 million but climbed 3.5% from the year-ago quarter.

By sales mix, new video game hardware sales dropped 14.1% to $276 million, whereas sales of new video game software climbed 9.1% to $839.1 million. Sales of used video games registered a growth of 4% to $528 million.

Management Guided

At the last earnings release, GameStop provided fourth quarter and fiscal 2010 guidance. The company projected fourth quarter earnings in the range of $1.53 to $1.59 and fiscal 2010 earnings between $2.63 and $2.69 per share. Management expects comparable-store sales growth between 2% and 4% for the quarter and flat-to-2% for the year.

Fourth-Quarter 2010 Zacks Consensus

The analysts considered by Zacks, expect GameStop to post fourth-quarter 2010 earnings of $1.56 per share. The current Zacks Consensus Estimate reflects a growth of 20.9% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between $1.53 and $1.61.

Zacks Agreement & Magnitude

Of the 15 analysts following the stock, none of the analysts have revised their projections in the last 7 or 30 days, thereby leaving the Zacks Consensus Estimate unchanged.

Mixed Earnings Surprise History

With respect to earnings surprises, GameStop has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 3.7% to positive 2.7%. The average remained at positive 0.7%. This suggests that GameStop has beaten the Zacks Consensus Estimate by an average of 0.7% in the trailing four quarters.

GameStop Balances Risk-Reward

GameStop is well positioned to take advantage of the growing market for video game products and PC entertainment software. The company’s strategy is to grow through store expansions in favorable localities, by providing the largest title collection of video games, and leveraging its first-to-market distribution network to offer the latest hardware and software releases.

GameStop provides a greater selection of used video game products for both current and previous generation platforms. It holds a significant position in this market, which has been resilient to the recent economic downturn.

The video game industry is highly competitive and video game shoppers now have many alternatives to buy software, hardware and game accessories for video game systems and personal computers. Retail heavyweights such as Wal-Mart Stores Inc. (WMT) and Best Buy Company Inc. (BBY) have also entered the video game market. These larger retailers could dent GameStop’s sales and margins.

Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels. This may prompt consumers to curtail their entertainment expenditures, which in turn, could result in lower store traffic and reduced profitability for the company.

Currently, consumers can only download a limited number of PC entertainment software and older generation video games from the Internet. However, with the advancement of technology, if consumers’ online accessibility increases, they may no longer prefer to buy PC entertainment software and video games through the company’s retail stores.

Given the pros and cons, we prefer to maintain a long-term ‘Neutral’ rating on the stock. Moreover, GameStop holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, and correlates with our long-term view.

GAMESTOP CORP (GME): Free Stock Analysis Report

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