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GameStop Corporation ( GME - Analyst Report ) , the video game and entertainment software retailer, reported its second quarter 2012 financial results on August 16, 2012. In the subsequent paragraphs we will discuss the company’s scorecard, based on its recent earnings announcement, the estimate revisions by analysts as well as Zacks Rank and long-term recommendation on the stock.
Recap of the Second-Quarter
GameStop posted earnings of 16 cents a share, beating the Zacks Consensus Estimate by a couple of cents, but fell significantly from 22 cents earned in the prior-year quarter.
GameStop reported a fall in its top line and comparable-store sales, due to the lack of significant game title launches. The company posted total revenue of $1,550.2 million, down 11.1% from the year-ago quarter and falling short of the Zacks Consensus Revenue Estimate of $1,600 million.
(Read full report on earnings: GameStop Beats on EPS, Rev Misses)
For fiscal 2012, GameStop anticipates comparable-store sales to decrease from 10% to 2%. However, GameStop continues to expect fiscal 2012 earnings in the range of $3.10 - $3.30 per share.
For the third quarter of 2012, GameStop expects comparable store sales to decline from 10% to 5%. Earnings are expected to be in the range of 28 - 36 cents.
Agreement of Estimate Revision
In the last 30 days, 12 out of 16 analysts covering the stock lowered their estimates, whereas only two of the estimates were revised upwards for the third quarter of 2012. On the other hand, for the fourth quarter, 13 analysts (out of 18) made upward revisions, whereas one estimate was trimmed.
For fiscal 2012, 6 analysts (out of 18) revised their estimates upward, while another 6 estimates were trimmed in the last 30 days. For fiscal 2013, 6 analysts (out of a total of 17) increased their estimates and 5 analyst made downward revisions.
Drivers of Estimate Revisions
GameStop posted a decline of 11.1% in total revenue with comparable-store sales falling 9.3% during second-quarter 2012, reflecting lack of significant game title launches and lower-than expected hardware and software sales. Moreover, the company’s gross profit fell 4.4% to $519.3 million and operating income plunged 35.6% to $34.5 million, whereas operating margin contracted 80 basis points to 2.3%.
Following the company’s year-over-year decline in the second-quarter revenue and profitability, most of the analysts lowered their estimates for the third-quarter of 2012.
However, the analysts remain positive for the fourth-quarter results as GameStop continues to branch out and transform 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 to its results. Further, 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.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.
The Zacks Consensus Estimate for the third quarter of 2012 has moved down by 9 cents to 32 cents a share in the last 30 days. The Zacks Consensus Estimate for the fourth quarter has increased by 6 cents to $2.13.
For fiscal 2012, the Zacks Consensus Estimate crept down by a couple of cents to $3.13 in the last 30 days. For fiscal 2013, the Zacks Consensus Estimate went up by a penny to $3.37.
GameStop which faces stiff competition from Amazon.com Inc. ( AMZN - Analyst Report ) is well positioned to take the 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 by leveraging its first-to-market distribution network to offer the latest hardware and software releases.
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 consumers’ accessibility increases, they may no longer prefer to buy PC entertainment software and video games through the company’s retail stores. This may hit the company’s sales and impede future growth.
As a result, the company carries a Zacks #3 Rank implying short-term Hold rating for the next 1-3 months and we maintain our long-term ‘Neutral’ recommendation on the stock.
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks 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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