We have maintained our long-term Neutral recommendation on GameStop Corporation (GME - Analyst Report) with a target price of $55.00.
Why the Reiteration?
GameStop did surprise us with its encouraging second-quarter fiscal 2013 results, especially given the slump that persists in the gaming industry. Gaming companies are witnessing a continued decline in video game retail sales.
Amid challenges, strong performance of the company’s digital and mobile businesses, effective cost management, gross margin improvement and a gain in market share facilitated GameStop to post earnings of 9 cents a share that comfortably surpassed the Zacks Consensus Estimate of 4 cents.
Expecting favorable trends in new console pre-orders and better-than-expected launch quantity allocation, management came up with an encouraging earnings outlook for fiscal 2013.
GameStop now envisions earnings in the range of $3.00 and $3.20 per share, up from its earlier guidance range of $2.90 to $3.15. Comparable-stores sales are expected to be in the range of -3.5% to +1.5%. For the upcoming quarter, GameStop forecasts comparable-store sales to increase between 11% and 15%, while earnings are expected in the range of 50 cents to 55 cents a share.
On the whole, GameStop’s second-quarter results were encouraging. However, a year-over-year drop of 10.7% in the top line and a 43.8% decline in the bottom line did disappoint us. Moreover, we expect video game retail sales to remain sluggish in the coming quarters and expect customers to postpone their purchasing activities till the release of new hardware consoles from Microsoft and Sony.
Further, the video game industry is highly competitive, and video game shoppers now have several alternatives to buy software, hardware, and game accessories for video game systems and personal computers. Alongside, competition from retail heavyweights such as Amazon.com Inc. (AMZN - Analyst Report), Wal-Mart Stores Inc. (WMT - Analyst Report) and Best Buy Co., Inc. (BBY - Analyst Report) could dent GameStop’s sales and margins.
That being said, we remain optimistic on the company’s digital and mobile business. We believe that mobile has strong growth potential due to the improving gaming quality, which is the major factor behind higher user spending.
Currently, GameStop holds a Zacks Rank #2 (Buy).