GameStop Corporation (GME - Analyst Report) – the video game and entertainment software retailer – reported its fiscal third quarter 2012 (ended October, 2012) financial results on November 15, 2012. In the subsequent paragraphs we will discuss the company’s scorecard, based on its recent earnings announcement, the estimate revisions by analysts, the Zacks Rank as well as long-term recommendation on the stock.
Recap of the Third-Quarter
GameStop posted earnings of 38 cents a share, beating the Zacks Consensus Estimate of 32 cents; however, it fell 2.6% from 29 cents earned in the year-ago 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 $1,772.8 million, down 8.9% from the year-ago quarter and fell short of the Zacks Consensus Revenue Estimate of $1,791.0 million.
(Read full report on earnings: GameStop Beats on EPS, Sales Down)
For fiscal 2012, GameStop anticipates comparable-store sales to decrease in the range of 6%–9%. However, GameStop continues to expect fiscal 2012 earnings between $3.10 and $3.30 per share.
For the fiscal fourth quarter of 2012, GameStop expects comparable store sales in the range of -7%–1%. Earnings are expected to be in the range of $2.07–$2.27 per share.
Agreement of Estimate Revision
In the last 30 days, 8 out of 17 estimates were lowered and similarly 8 estimates were revised upward for the fourth quarter of 2012. On the other hand, for the first quarter of 2013, 6 out of 10 were increased whereas one estimate was trimmed down.
For fiscal 2012, 14 out of 17 estimates were revised upward, while only 1 estimate came down in the last 30 days. For fiscal 2013, 12 out of 18 estimates increased and 2 estimates were lowered.
Drivers of Estimate Revisions
GameStop posted a decline of 8.9% in total revenue with comparable-store sales falling 8.3% during third-quarter 2012, reflecting lack of significant game title launches and lower-than-expected hardware and software sales. Moreover, the company’s gross profit fell 2.7% to $557.4 million and operating income dropped 8.8% to $75.3 million, whereas operating margin remained unchanged at 4.2%.
Owing to the company’s year-over-year decline in the third-quarter revenue and profitability, some of the analysts lowered their estimates for the fourth-quarter of 2012.
However, the analysts remain positive about 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 as well as PowerUp Rewards program makes it a popular shopping destination.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for fiscal 2012 and 2013 by the analysts is clearly reflected through changes in the Zacks Consensus Estimates. For fiscal 2012, the Zacks Consensus Estimate moved up by 6 cents to $3.20 per share in the last 30 days, whereas for fiscal 2013, the Zacks Consensus Estimate went up by 3 cents to $3.44 per share.
However, for the fiscal fourth-quarter, the Zacks Consensus Estimate remains unchanged at $2.17 per share in the last 30 days, whereas the Zacks Consensus Estimate for the fiscal first quarter of 2013 has increased by a couple of cents to 60 cents a share.
GameStop 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 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 hurt the company’s sales and impede future growth. As a result, we maintain our long-term ‘Neutral’ recommendation on GameStop, a peer of Amazon.com Inc. (AMZN - Analyst Report).
The company carries a Zacks #2 Rank implying short-term Buy rating for the next 1-3 months, based on positive earnings surprise with an average of 11.2%.
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