Shares of GameStop Corp. (GME) plunged roughly 11% during aftermarket trading hours yesterday, after this video game and entertainment software retailer posted lower-than-expected third-quarter fiscal 2014 results and narrowed its full-year earnings forecast. Management informed that the delay in the release of Assassin’s Creed Unity adversely impacted the company’s top line and in turn, the bottom line by 5 cents a share.
This Zacks Rank #3 (Hold) company delivered quarterly earnings of 57 cents a share that missed the Zacks Consensus Estimate of 62 cents and came a penny below the prior-year quarter figure. Total net sales edged down 0.7% year over year to $2,092.2 million and came below the Zacks Consensus Estimate of $2,214 million. Comparable-store sales also declined 2.3% year over year.
By sales mix, new video game hardware sales surged over twofold to $449.7 million owing to robust demand of Sony Corporation’s (SNE) PlayStation 4 and Microsoft Corporation’s (MSFT) Xbox One hardware. On the contrary, new video game software sales plummeted 34.4% to $743.7 million as the prior-year quarter benefited from strong releases of AAA titles, such as Grand Theft Auto V, Battlefield 4, Batman: Arkham Origins, Pokemon X/Y and Assassin’s Creed IV: Black Flag.
Pre-owned and value video game products’ sales rose 2.6% to $499.3 million. Sales in the other category declined 18.3% to $86 million.
Video game accessories’ sales surged 35.3% to $132.6 million whereas sales in the digital category soared 19.3% to $54.9 million. On the other hand, mobile and consumer electronics’ sales more than doubled to $126 million, attributable to contributions from Spring Mobile. Digital receipts grew 52.4% to $210.3 million during the quarter.
The Technology Brands segment, which contributed 11% of the operating earnings, is expected to sustain its growth momentum, attributable to its collaboration with AT&T and the new range of Apple products.
Worldwide multichannel sales – mobile, web-in-store, pick-up at store and eCommerce – increased 20.1% on the back of 91.4% improvement registered in the pick-up at store program.
GameStop continued to branch out and is transforming itself into a mixed retailer of physical and digital gaming, and electronics products. The company’s venture in digital, iDevice and gaming tablet businesses would be accretive to its results. The company also remained optimistic about the new game releases and robust growth in next-generation consoles.
Recently, GameStop exited from the Spanish market, after a careful evaluation of its operations. The company divested some of its outlets to GAME Digital Plc and decided to close the remaining. Management informed that it will deploy resources in other profitable markets, where it holds significant share and hinted that it will also enhance its presence in other parts of Europe.
During the quarter, gross profit increased 4% to $622.2 million, attributable to a fall in cost of sales. Gross margin expanded 130 basis points to 29.7%. On the other hand, operating income slid 17.7% to $89.8 million, whereas operating margin contracted 90 basis points to 4.3%.
Other Financial Aspects
GameStop, which competes with Best Buy Co., Inc. (BBY), ended the quarter with cash and cash equivalents of $374 million, net receivables of $116.9 million, long-term debt of $350.2 million and shareholders’ equity of $2,008.6 million.
During the quarter, GameStop bought back 3.58 million shares worth $144 million. Earlier this month, the company’s board of directors approved a new $500 million share buyback program that overrides the remaining $176 million under the former authorization.
GameStop declared a quarterly dividend of 33 cents a share to be paid on Dec 16, to stakeholders of record as of Nov 25, 2014.
Store Update
GameStop, at the end of the quarter, operated 6,664 outlets, comprising 4,183 U.S. video game stores, 2,073 international video game stores and 408 Technology Brand stores (comprising 311 AT&T branded outlets operated by Spring Mobile, 51 Cricket outlets and 46 Simply Mac outlets). The company also opened 5 video game outlets and shuttered 19 stores in the U.S. Further, it opened 11 and closed 120 stores internationally, including those in Spain.
The company acquired 55 Technology Brand stores and opened 34 additional stores. Management expects to conclude 2014 with about 500 Technology Brand stores and anticipates adding another 300 stores next year.
Peek into Guidance
Management hinted that fall in sales of the prior-generation software on account of the transition to next-generation consoles and shift in titles out of 2014 compelled them to trim the guidance.
Management now forecasts fourth-quarter fiscal 2014 comparable-store sales in the band of negative 5% to positive 2%. For the fiscal year, GameStop now expects comps growth of 2% to 5%, down from a 6% to 12% increase, projected earlier.
The company now envisions earnings in the range of $2.08 to $2.24 for the fourth quarter and between $3.40 and $3.55 for fiscal 2014. The company had earlier anticipated earnings in the band of $3.40 to $3.70 for the full year.
The current Zacks Consensus Estimate for the fourth quarter and fiscal 2014 stands at $2.35 and $3.73 per share, respectively, and could witness a downward revision in the coming days.
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