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Bear of the Day: GameStop (GME)

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GameStop Corp. (GME - Free Report) continues to see shrinking earnings due to changes in the video game industry. This Zacks Rank #5 (Strong Sell) is expected to see an 8% decline in earnings in fiscal 2018.

GameStop operates over 7,200 stores in 14 countries. It operates in digital sales including Game Informer magazine and ThinkGeek. It also has a Technology Brands segment which includes 1,400 Spring Mobile AT&T and Simply Mac stores.

Spring Mobile sells AT&T products including DIRECTV and Simply Mac sells the full line of Apple products including laptops, tablets and smartphones.

Another Beat in the Fourth Quarter

On Mar 28, GameStop reported its fiscal fourth quarter 2017 results and beat the Zacks Consensus reporting $2.02 versus the consensus of $1.96.

It has beaten 8 out of the last 9 quarters, so the earnings beats aren't a problem.

The fourth quarter was driven by Black Friday and holiday promotions as well as growth in the hardware business, especially with the Nintendo Switch.

Total global sales rose 15% to $3.5 billion with comparable store sales up 12.2%. The US saw 14.2% while international comparables were 8.3%.

New hardware sales was the driver, rising 44.8% thanks to demand for Nintendo Switch, while new software sales rose 12.4%.

Collectibles sales was another bright spot, as those rose 22.8%, driven by continued expansion of licensed merchandise offerings and targeted promotions during the holidays.

Pre-owned sales, however, slumped, falling 2.6%.

Fiscal 2018 Guidance Is Light

Given the tough year-over-year comparable comps of the Nintendo Switch, which launched in the first half of 2017, the company expects earnings to be substantially  back half weighted.

It's looking for a range of $3.00 to $3.35.

Comparable store sales, which don't include the technology brands, are expected to be flat to down 5%.

Estimates Cut

Given the guidance, which was more bullish than the Zacks Consensus, it's not surprising that the analysts have cut their estimates.

5 estimates were cut in the last 30 days pushing the Zacks Consensus down to $3.07 from $3.33. Apparently, the analysts are not optimistic that earnings will be on the high end of the company's range, hence the earnings revisions.

That's a decline of 8% as GameStop made $3.34 in 2017.

Estimates were also cut for fiscal 2019, pushing down the consensus to $2.76. That's another decline of 10%.

Is That Dividend Safe?

GameStop is paying a dividend currently yielding 11.2%.

It's among the highest on the Street.

The company has said that the dividend is safe, for now.

It expects to do $300 million in free cash flow in fiscal 2018 which can easily pay for the dividend given the share count.

Shares at 13-Year Lows

It's been a brutal ride for long term shareholders, if there are even any left.

Over the last two years, shares have been crushed, falling 56.9%.

Even year to date, they're down another 25.1%.

But are these shares now a deal?

GameStop trades with a forward P/E of just 4.4 and it has that high dividend.

But given those declining earnings, you might want to consider another player in the space.

Best Buy (BBY - Free Report) is also pretty cheap with a forward P/E of 14. It also pays a dividend, currently yielding 2.6%.

It's a Zacks Rank #3 (Hold).

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