Earnings Scorecard: GameStop

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

Street analysts had more than a week to ponder the news. In the subsequent paragraphs, we cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Report Review

Strong digital sales helped GameStop post quarterly earnings of 39 cents per share, up 2.6% year over year from 38 cents a share.However, reported earnings were in line with the Zacks Consensus Estimate.

GameStop, which faces stiff competition from Amazon.com Inc. ( AMZN - Analyst Report ) , reported total revenue of $1,946.8 million, up 2.5% from $1,899.2 in the year-ago quarter. However, total revenue remained below the Zacks Consensus Revenue Estimate of $1,963 million.

For the fourth quarter of 2011, GameStop anticipates comparable store sales in the range of flat to up 2%. GameStop expects earnings in the range of $1.66 to $1.76 per share.

For fiscal year 2011, the company reiterated its previously announced earnings guidance range of $2.82 to $2.92 per share, reflecting an increase of 6.4% to 10.2% over the last fiscal year.

GameStop expects comparable store sales in the range of -1% to flat, reflecting revenue growth of 2% to 3% for fiscal 2011.

(Read our full coverage on this earnings report: GameStop Reports In Line).

Agreement of Estimate Revisions

A mixed sentiment is evident among analysts following the earnings release. Over the last 30 days, 5 out of the 16 analysts covering the stock increased their estimates while 7 analysts lowered the same for fourth quarter 2011. For first quarter 2012, 4 analysts revised their estimates in the upward direction, while an equal number of analysts reduced the estimates.

For fiscal 2011, 2 analysts increased their estimates while 10 analysts moved in the opposite direction. For 2012, 5 analysts increased their estimates, while 7 analysts lowered their projection.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimate for fiscal 2011 came down by 3 cents to $2.87, while for fiscal 2012, the Estimate inched down a penny to $3.13.

For both the fourth quarter of 2011 and first quarter of 2012, the Zacks Consensus Estimates inched down a penny to $1.72 and 60 cents, respectively, in the last 30 days.

The current Zacks Consensus for fourth quarter 2011 is pegged from a low of $1.67 to a high of $1.86. For fiscal 2011, the estimates range from $2.83 to $2.93.

Factors Driving Estimates

GameStop continued to expand and emerged as a mixed retailer of physical and digital gaming and electronics products. The company’s foray into digital, iDevice and gaming tablet businesses would be accretive to its results. The company’s buy-sell-trade model of selling new games and buying back used games and PowerUp Rewards program makes it a preferred destination for shopping.

Moreover, GameStop is well positioned to take advantage of a 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 by leveraging its first-to-market distribution network to offer the latest hardware and software releases.

However, the video game industry is highly competitive, and video game shoppers now have a host of alternatives to buy software, hardware, and game accessories for video game systems and personal computers. Retail heavyweights have also entered the video game market. These larger retailers could dent GameStop’s sales and margins.

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 the consumer’s accessibility increases, they may no longer prefer to buy PC entertainment software and video games through the company’s retail stores.

We have a long-term ‘Neutral’ recommendation on GameStop. Moreover, GameStop has a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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/