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GameStop's (GME) May Disappoint in Q4 Earnings: Here's Why

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GameStop Corp. (GME - Free Report) is slated to report fourth-quarter fiscal 2016 results on Mar 23, after the closing bell. In the previous quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 4.3%.

Notably, in the trailing four quarters, the company surpassed the Zacks Consensus Estimate with a positive earnings surprise of 5.8%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The question lingering in investors’ minds now is, whether GameStop will be able to post positive earnings surprise in the quarter to be reported. The current Zacks Consensus Estimate for the quarter under review is $2.29, reflecting a year-over-year decrease of nearly 5%. We note that the Zacks Consensus Estimate has been stable in the past 30 days. Analysts polled by Zacks expect revenues of $3,116 million, in comparison with $3,525 million reported in the prior-year quarter.

We note that the stock has underperformed the Zacks categorized Retail-Consumer Electronic industry and the S&P 500 in the past one year. The company’s shares have declined 15.1%, while the Zacks categorized industry has gained 12.6% in the past six months. Meanwhile, the S&P 500 has gained 9.4% during the same time frame.

Factors at Play

GameStop’s shares have been hit hard lately and have underperformed the industry in the past six months. The challenging retail landscape, aggressive promotional strategies and waning store traffic have been weighing on the company’s performance. Further, this was evident in the company’s holiday sales results. The company generated total global sales of $2.50 billion, down 16.4% year over year. Comps decreased 18.7%, reflecting a drop of 26.6% and 13% in November and December, respectively. New hardware sales plunged 30.3% due to significant decline in PlayStation 4 and Xbox One hardware sales. Even the sturdy performance of new hardware, such as the Nintendo NES Classic failed to act as the savior.

Following a sluggish holiday season, management expects comps to decline in the range of 16–18% in the final quarter compared with 7–12% drop projected earlier. For fiscal 2016, GameStop envisions comps to decline between 10% and 12% compared with the prior estimate of 6.5–9.5% decline. However, management reiterated its earnings projection. GameStop continues to expect earnings in the band of $2.23 to $2.38 for the fourth quarter and between $3.65 and $3.80 per share for the fiscal year.

GameStop’s basic concern is the weakness prevailing in new software sales, which is heightening apprehensions about the impact of digital downloads on the same.

What Does the Zacks Model Unveil?

Our proven model does not conclusively show that GameStop is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.GameStop has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.29. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Moreover, GameStop carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Conagra Brands, Inc. (CAG - Free Report) currently has an Earnings ESP of +4.44% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fastenal Company (FAST - Free Report) currently has an Earnings ESP of +2.17% and a Zacks Rank #2.

Constellation Brands, Inc. (STZ - Free Report) currently has an Earnings ESP of +0.73% and a Zacks Rank #3.

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