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GameStop (GME) to Report Q1 Earnings: What's in the Offing?

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GameStop Corp. (GME - Free Report) is expected to report first-quarter fiscal 2018 results on May 24. In the trailing four quarters, this consumer electronics’ retailer has outperformed the Zacks Consensus Estimate by an average of 12.7%. In the last reported quarter, the company delivered a positive earnings surprise of 3.1%.

Let’s delve deep and take a look at the factors that will be influencing the quarterly results.

Factors at Play

GameStop has been performing well with respect to its new hardware and software as well as collectibles. In fact, new consoles such as Nintendo Switch, the PS4 Pro and the Xbox One X are driving sales in the hardware category. Also, the investments made in the collectibles business like square footage expansion in its video game stores to offer compelling products have proved conducive to the company. In the last report, collectibles increased 22.8% on a year- over-year basis.

Further, management is focused on capitalizing growth opportunities in the areas such as pre-owned and Technology Brands. With regard to this, GameStop is expected to leverage its loyalty program, trade credit benefits as well as develop skills of its sales associates to provide value to customers. Going ahead, it expects Nintendo Switch games to enhance the pre-owned business.

However, pre-owned and value video game products sales declined 2.6% year over year in the fourth quarter of fiscal 2017. Further, the company has been witnessing soft performance across its Technology Brands due to some changes in the compensation structure by AT&T, operational execution headwind and delay in launch of the iPhone 8 and iPhone X. Per management, performance of Technology Brands was also not up to the mark in fiscal 2017 and fell short of estimates. Sales at Technology Brands were down 14.2% in the last reported quarter compared with the year-ago period. Unfortunately, AT&T compensation changes will continue lingering and hurting Technology Brands, which in turn is likely to dent the company’s first-quarter results.

Additionally, GameStop has been grappling with margin constraints for a while now.  Apparently, gross margin shriveled 380 basis points (bps) in fourth-quarter fiscal 2017. Also, operating margin contracted 250 bps due to higher SG&A expenses.

GameStop Corp. Price, Consensus and EPS Surprise

GameStop Corp. Price, Consensus and EPS Surprise | GameStop Corp. Quote

Notably, the Zacks Consensus estimate for first-quarter fiscal 2018 sales is pegged at $1,957 million, down 4.4% from the year-ago period. Further, analysts polled by Zacks expect comparable store sales at domestic locations to decline 5.5% year over year.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 35 cents, reflecting a year-over-year decrease of 44.4%. Over the last 30 days, the consensus mark has moved south by 5 cents.

Zacks Model

Our proven model also does not show that GameStop is likely to beat estimates this quarter. This is because a stock needs to have both — a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

GameStop’s Earnings ESP of +7.28% increases the predictive power of earnings beat. However, the company has a Zacks Rank #4 (Sell), which makes surprise prediction difficult.

As it is we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) 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:

Dollar General Corporation (DG - Free Report) has an Earnings ESP of +2.45% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
American Eagle Outfitters, Inc. (AEO - Free Report) has an Earnings ESP of +0.14% and a Zacks Rank of 3.

Ross Stores, Inc. (ROST - Free Report) has an Earnings ESP of +0.14% and a Zacks Rank #3.

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