GameStop Corporation (GME), the video game and entertainment software retailer, recently posted soft second-quarter 2011 results.
Street analysts had over a week to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by the analysts as well as the Zacks Rank and long-term recommendation for the stock.
Earnings Report Review
GameStop’s quarterly earnings of 22 cents a share came down 15.4% from 26 cents earned in the prior-year quarter but remained a penny ahead of the Zacks Consensus Estimate.
The Grapevine, Texas-based 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. However, sales of used video games increased during the quarter.
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.
Consequently, 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.
However, contrary to market expectations, GameStop stood by its fiscal 2011 guidance and continues to anticipate earnings in the range of $2.82 to $2.92 per share. For the third quarter of 2011, management 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.
(Read our full coverage on this earnings report: GameStop Reports Weak 2Q)
Agreement of Estimate Revisions
In the last 7 days, 4 out of 16 analysts covering the stock lowered their estimates, whereas 5 analysts raised theirs for third-quarter 2011. For the fourth quarter, 8 analysts reduced and 3 analysts increased their estimates.
For fiscal 2011, 5 analysts moved their estimates downward, whereas 2 analysts moved theirs upward. For fiscal 2012, 7 analysts lowered their estimates and 2 analysts raised the same in the last 7 days.
Magnitude of Estimate Revisions
In the last 7 days, the Zacks Consensus Estimate for third-quarter 2011 had remained constant at 39 cents. For the fourth quarter, the Zacks Consensus Estimate moved down by 3 cents to $1.73.
For fiscal 2011, the Zacks Consensus Estimate remained stable at $2.89 but dropped 3 cents to $3.13 for fiscal 2012 in the last 7 days.
GameStop in Neutral Lane
GameStop Corporation 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.
The company holds a significant position in the used video game products market. GameStop provides a greater 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. Sales of used video games registered a growth of 12% to $633.1 million, whereas digital sales soared 69% during second-quarter 2011.
The healthy used video games and digital sales led to a gross margin expansion of 250 basis points to 31.2%.
However, new video game hardware sales and new video game software sales ran into rough weather. The video game industry is highly competitive and retail heavyweights such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT) 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’ 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 remain ‘Neutral’ on the stock over the long term. GameStop also holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, and correlates with our long-term recommendation.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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