Earnings Scorecard: GameStop

GameStop Corporation (GME), the video game and entertainment software retailer, recently posted first-quarter 2011 results.

Street analysts had nearly a week to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.

Earnings Report Review

GameStop’s quarterly earnings of 56 cents a share surpassed the Zacks Consensus Estimate of 54 cents and rose 16.7% from 48 cents earned in the prior-year quarter driven by a 53% growth in digital sales.

The Grapevine, Texas-based GameStop posted total revenue of $2,281.4 million that came ahead of the Zacks Consensus Revenue Estimate of $2,231.0 million and climbed 9.5% from the year-ago quarter. The retailer stated that comparable-store sales increased 5.3% during the quarter, reflecting robust sales of HD console, the launch of the Nintendo 3DS and a sturdy performance by the PowerUp Rewards loyalty program.

Moving forward, for the second quarter of 2011, GameStop anticipates comparable-store sales to be in the range of -2.0% to flat. GameStop expects earnings in the range of 20 cents to 23 cents per share.

For fiscal 2011, the company stood by its earlier guidance and anticipates an increase of 3.5% to 5.5% in comparable-store sales with earnings in the range of $2.82 to $2.92 per share.

(Read our full coverage on this earnings report: GameStop Beats on Digital Sales)

Agreement of Estimate Revisions

In the last 7 days, all the 16 analysts following the stock lowered their estimates with none increasing their projections for second-quarter 2011. For the third quarter, 6 analysts raised their estimates while 5 lowered theirs.

For fiscal 2011, 4 analysts lowered their estimates while 2 analysts revised their estimates upward in the last 7 days. For fiscal 2012, 3 analysts increased their projections and 2 analysts lowered their estimates in the last 7 days.

Magnitude of Estimate Revisions

For second-quarter 2011, the Zacks Consensus Estimate dropped by 6 cents to 22 cents and for the third quarter it remained stable at 39 cents a share in the last 7 days.

In the last 7 days, the Zacks Consensus Estimates for fiscal 2011 fell by a penny to $2.91 and for 2012 it dropped by 2 cents to $3.15 per share.

The estimates in the current Zacks Consensus for second-quarter 2011 range from a low of 20 cents to a high of 24 cents a share. For fiscal 2011, the estimates range from $2.80 to $3.10.

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 expansion 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 have 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.

GameStop (GME): Free Stock Analysis Report

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