Weak schedule of new software title releases and lower sales made GameStop Corporation (GME), the video game and entertainment software retailer, to post soft second-quarter 2011 results.
The quarterly earnings of 22 cents a share came down 15.4% from 26 cents earned in the prior-year quarter. However, the earnings were a penny ahead of the Zacks Consensus Estimate.
According to the market research firm, The NPD Group, the gaming industry appears to be the latest victim of the recent economic turmoil in the U.S.as the industry contracted by 26.0% in the month of July. Further, July’s decline marked the industry’s third-straight month when sales of video games’ software, hardware, and accessories in the U.S. shrinked in double digits.
The Zacks Consensus Estimate came down by a penny prior to the earnings release due to downward revision in the estimates made by 5 out of 17 analysts covering the stock in the last 30 days. None of the analysts have raised their projections.
Revenue and Margins
The Grapevine, Texas based company, GameStop, posted total revenue of $1,743.7 million that came below the Zacks Consensus Revenue Estimate of $1,819 million and declined 3.1% from the year-ago quarter. The retailer stated that comparable-store sales decreased 9.1% during the quarter, reflecting sluggish hardware sales and soft schedule of new software title releases compared to the prior-year period.
By sales mix, new video game hardware sales went down 12.3% to $275.6 million, whereas sales of new video game software decreased 9.6% to $599.8 million. Amid this grim picture, sales of used video games registered a growth of 12% to $633.1 million.
Robust digital sales and a 6.4% decrease in cost of sales facilitated GameStop’s gross profit to increase 5.1% to $543.2 million, whereas gross margin expanded 250 basis points to 31.2%. However, operating income decreased 23% to $53.6 million, whereas operating margin contracted 80 basis points to 3.1%.
Other Details
GameStop ended the quarter with cash and cash equivalents of $224.8 million and net receivables of $44.2 million. During the quarter, the company bought back 1.36 million shares at $25.38 each.
Management Guided
Moving forward, for the third quarter of 2011, GameStop anticipates comparable-store sales to be in the range of 2% to 4%. GameStop expects earnings in the range of 38 cents to 41 cents per share.
For fiscal year 2011, the company stood by its earlier guidance and anticipates earnings in the range of $2.82 to $2.92 per share, reflecting an increase of 6.4% to 10.2% over the last fiscal.
GameStop trimmed its fiscal 2011 comparable-store sales guidance. The company now expects comparable-store sales to increase in the range of 1.0% to 3.0%, reflecting a revenue growth of 4.5% to 6.5%. Earlier the company forecasted a 3.5% to 5.5% increase in comparable-store sales.
Investment Rationale
GameStop, which faces stiff competition from Amazon.com Inc. (AMZN), is well positioned to benefit from the gaming products and PC amusement software market. The company follows a strategy of store extensions in productive regions and offers the largest collection of games.
Further, GameStop is a significant player in the used gaming products market. The company provides a wide array of used video game products for both current and previous generation platforms. In addition, the market for these products has been resilient to the recent economic downturn.
Moreover, GameStop recently completed the incorporation of GameStop Impulse on its website. In recent times, there has been a sharp rise in consumer spending on digital download, mobile gaming apps, social network games and used games. In such a scenario, GameStop Impulse will help the company to strengthen its foothold.
Going forward, with the increasing demand for online social gaming, the video game industry is marking changes in business dynamics. Moreover, the social gaming market is witnessing healthy growth due to its social and interactive environment compared with the conventional platforms.
However, the decrease in new game releases, deferred discretionary purchases and pricing pressure might dent results for the company. Further, the recent technological advancements have made the industry highly aggressive as buyers now have multiple options to obtain video game accessories and softwares for gaming systems and computers.
Currently, we have a long-term Neutral rating on GameStop. Moreover, GameStop holds a Zacks #3 Rank, which translates into a short-term Hold recommendation, also correlates with our long-term view.
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