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GameStop Downgraded to Strong Sell

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On Feb 4, 2014, Zacks Investment Research downgraded GameStop Corp. (GME - Free Report) , the videogame software retailer, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Shares of GameStop have plunged roughly 6.5% since the company reported its holiday sales results, when it lowered the earnings outlook due to soft demand for Xbox 360 and PlayStation 3 software. This resulted in a 22.5% drop in the videogame retailer’s new software category sales.

Management took a cautious stance while providing guidance for fourth quarter and fiscal 2013. The company now projects fourth-quarter earnings between $1.85 and $1.95 and fiscal-year 2013 earnings in the band of $2.96 to $3.06 per share.

Earlier, this Grapevine, Texas based company had forecasted fourth-quarter earnings in the range of $1.97 to $2.14 and fiscal year 2013 earnings between $3.08 and $3.25 per share. However, the lowered outlook was enough to hurt investors’ sentiment. Also, the company’s stock has tumbled nearly 31.6% year to date.

The company’s performance could be attributable to the fact that the videogame industry is highly competitive and shoppers have many alternatives to buy software, hardware and other video game accessories. Moreover, retail bigwigs such as Best Buy Co. Inc. (BBY - Free Report) have entered into the videogame market, which could dent GameStop’s sales and margins.

The dismal new software category sales and trimmed guidance triggered a downtrend in the Zacks Consensus Estimates, as analysts become less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 6.8% to $3.02 for fiscal 2013 and 6.1% to $3.83 per share for fiscal 2014 in the past 30 days.

Other Stocks That Warrant a Look

Other better-ranked retail stocks that look promising and are expected to continue with their upbeat performance, include Hanesbrands Inc. (HBI - Free Report) holding a Zacks Rank #1 (Strong Buy) and Michael Kors Holdings Ltd. (KORS - Free Report) sporting a Zacks Rank #2 (Buy).

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