Earnings Preview: GameStop

GameStop Corporation (GME), the video game and entertainment software retailer, is scheduled to report its first-quarter 2011 financial results on Thursday, May 19, 2011. The current Zacks Consensus Estimate for the quarter is 54 cents a share. For the quarter under review, revenue is $2,231 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2010, a Synopsis

GameStop’s fourth-quarter 2010 earnings of $1.56 per share came in line with the Zacks Consensus Estimate and increased 20.9% from $1.29 earned in the prior-year quarter. The improvement was driven by digital offerings, power up rewards loyalty program and e-commerce inventiveness.

The Grapevine, Texas based company, GameStop, had posted total revenue of $3,692.8 million, which fell short of the Zacks Consensus Revenue Estimate of $3,710.0 million but climbed 4.8% from the year-ago quarter. The retailer had also indicated a 2.6% rise in comparable-store sales.

By sales mix, new video game hardware sales went up 5.9% to $781.4 million, whereas sales of new video game software inched up 2.1% to $1,593.4 million. Sales of used video games registered a growth of 3.7% to $805.6 million.

Management Guided

At its last earnings release, GameStop provided first quarter and fiscal 2011 guidance. For first-quarter 2011, the company had projected increases in bands of 6% to 8% for net sales and 4% to 6% for comparable-store sales. GameStop guided earnings in the range of 53 cents to 55 cents a share, representing a year-over-year growth of 10.4% to 14.6%.

For fiscal 2011, GameStop projected earnings in the range of $2.82 to $2.92 per share, reflecting a year-over-year growth of 5.6% to 9.4%. Net sales were projected to increase in the range of 6% to 8% with 3.5% to 5.5% higher comparable-store sales.

First-Quarter 2011 Zacks Consensus

The analysts considered by Zacks, expect GameStop to post first-quarter 2011 earnings of 54 cents a share. The current Zacks Consensus Estimate reflects a growth of 12.5% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 53 cents and 56 cents.

Zacks Agreement & Magnitude

Of the 17 analysts following the stock, none of the analysts have revised any projection 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 0.4%. This suggests that GameStop has beaten the Zacks Consensus Estimate by an average of 0.4% 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 by leveraging its first-to-market distribution network to offer the latest hardware and software releases.

The company holds a significant position in the used video game products market, providing a vast selection of used video game products for both current and previous generation platforms. The market for used video game products has been resilient to the recent economic downturn.

The video game industry is highly competitive and video game shoppers plenty of choices 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. These 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 have greater accessibility, 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.

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