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Why GameStop (GME) Stock Slid Despite Solid Q1 Earnings

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GameStop Corp. (GME - Free Report) reported better-than-expected results in the first quarter of fiscal 2016. However, the company’s shares have been down more than 14% since the earnings release on May 26, 2016. So why this disconnection? Let’s find out.

Despite the positive earnings and revenues surprise, GameStop provided a lackluster fiscal second-quarter guidance. Management projects sales to decline in the range of negative 1–4%, and comps decline in the band of 4–7%. The company expects fiscal second-quarter earnings in the range of 23–30 cents per share as against the year-ago figure of 31 cents.    

Following the disappointing guidance, the Zacks Consensus Estimate for the fiscal second quarter was revised downward. Over the past 60 days, the Zacks Consensus Estimate for fiscal second quarter has plunged 17.6% to 28 cents.

Despite the disappointing fiscal second-quarter guidance, the company is confident of achieving better results in fiscal 2016. In fact, the company reiterated its fiscal 2016 comps and earnings guidance. Comps are expected between negative 3% and 0%, while earnings are projected in the range of $3.90–$4.05 per share for fiscal 2016.

The collaborations with AT&T and Apple have proved to be lucrative for GameStop. Spring Mobile is now AT&T’s biggest dealer in the U.S. In the fiscal first quarter, the Technology Brands segment’s revenues surged 62.2% year over year. The company added 18 net Technology Brand stores in the quarter, which translates to a total of 1,054 stores. Further, the segment is expected to sustain its growth momentum as the company is keen on rapidly expanding its footprint by opening more stores.

GameStop’s foray into the entertainment collectibles and licensed merchandising category has also been profitable. During the fiscal first quarter, the collectibles business sales soared 260% to $82.3 million. The company expects this business to grow further higher in the fiscal second quarter. GameStop anticipates the collectibles business to garner revenues of $450–$500 million in fiscal 2016 and $1 billion by fiscal 2019.

GameStop’s which shares space with Amazon.com, Inc. (AMZN - Free Report) , Wal-Mart Stores Inc. (WMT - Free Report) and Best Buy Co., Inc. (BBY - Free Report) currently has a Zacks Rank #3 (Hold).

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