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GameStop Corporation (GME - Analyst Report), the video game and entertainment software retailer, recently posted first-quarter 2012 earnings of 54 cents a share that came in line with the Zacks Consensus Estimate, but fell 3.6% from 56 cents earned in the prior-year quarter. The Zacks Consensus Estimate rose by a penny in the last 7 days following the company’s pre-announced results.  

Although GameStop bore the brunt of weak traffic, its reported earnings were near the higher end of the company’s guidance range of 52 cents to 55 cents, aided by increase in gross margin and contribution from pre-owned, mobile and digital operations.

Let’s Unveil the Picture

The slump in the video gaming industry persists due to increased online gaming activities, and shifting preferences toward tablets and mobile phones from traditional game consoles. The NPD Group, a market research firm, confirmed the continuing decline in the video game industry, as it stated that U.S. sales for April 2012 were down 32% from the comparable period of the previous year.

GameStop being a part of the video game industry is no exception. The company saw its top line falling and comparable-store sales struggling due to the lack of significant game title launches and lower-than-expected hardware and software sales.   

The Grapevine, Texas-based GameStop posted total revenue of $2,002.2 million, down 12.2% from the year-ago quarter, and also fell short of the Zacks Consensus Revenue Estimate of $2,061 million. The retailer stated that comparable-store sales tumbled 12.5% during the quarter.  

Management had earlier forecasted a decline of 7.5% to 9.5% in sales and a fall of 7.5% to 9% in comparable-store sales for the quarter under review.

By sales mix, new video game hardware sales plunged 19.4% to $348.6 million and new video game software sales dropped 20.1% to $731.1 million. However, used video game products showed some resiliency with sales declining marginally by 1% to $619 million. Sales in Other category edged down 1.9% to $303.5 million.  

Within Other category, Digital revenue surged 23% year-over-year, whereas Mobile sales came in at $12 million. GameStop expects mobile sales to reach a range of $150 to $200 million during fiscal 2012.

GameStop’s gross profit fell 3.3% to $599.9 million; however, gross margin expanded 280 basis points to 30% reflecting an equivalent contraction in cost of sales as a percentage of total revenue. Operating income slipped 12.3% to $115 million, whereas operating margin contracted 10 basis points to 5.7%.

Other Financial Details

GameStop ended the quarter with cash and cash equivalents of $329.1 million and net receivables of $48.1 million. During the quarter, the company bought back 5.35 million shares at $22.70 each, aggregating to $121.5 million. The company still has $455 million at its disposal under its share repurchase authorization.

The company also announced a quarterly dividend of 15 cents a share to be paid on June 12 to shareholders of record as of May 29.

Guidance

Moving forward, GameStop anticipates comparable-store sales to decrease between 5% and 11% during the second quarter and to remain flat or decline 5% during fiscal 2012.

Management now projects earnings between 10 cents and 18 cents for the second quarter, which is short of the Zacks Consensus Estimate of 26 cents. However, GameStop continues to expect fiscal 2012 earnings in the range of $3.10 to $3.30 per share. The current Zacks Consensus Estimate for the year is $3.19.

Closing Comments

Despite secular headwinds, we believe that the company is well positioned to drive sales in the long run. The company holds a significant position in the used video game products market, which has been resilient in this downturn.

GameStop continued to branch out and transformed as 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. The company’s buy-sell-trade model of selling new games and buying back used games and PowerUp Rewards program makes it a popular destination for shopping.

However, consumers increasing accessibility to video games and PC entertainment software over the Internet could hit the sales of packaged goods and used games.

Currently, we have a long-term Neutral recommendation on GameStop. Moreover, GameStop, which faces stiff competition from Amazon.com Inc. (AMZN - Analyst Report), holds a Zacks #3 Rank that translates into a short-term Hold rating.

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