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Why is GameStop (GME) Up 12.7% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for GameStop Corp. (GME - Free Report) . Shares have added about 12.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is GME due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

GameStop started fiscal 2018 on a mixed note, with earnings surpassing the Zacks Consensus Estimate and revenues lagging the same in the first quarter. Apart from this, the company witnessed year-over-year decline on both the fronts. Further, consolidated comparable store sales (comps) declined year over year after increasing in the last few quarters. Meanwhile, the Grapevine, TX-based company kept the fiscal 2018 view intact.

In the quarter under review, adjusted earnings per share tumbled 39.7% year over year to 38 cents. However, earnings surpassed the Zacks Consensus Estimate of 35 cents, which marked the company’s third straight quarter of earnings beat.

Net sales declined 5.5% (down 7.5% on a currency-neutral basis) year over year to $1,934 million, which fell short of the Zacks Consensus Estimate of $1,957 million. The video game retailer lagged estimates after four straight quarters of sales beat.

Let’s Delve Deeper

Consolidated comps decreased 5.3%, reflecting a decline of 11.6% at international locations and 2.6% at domestic locations.

By sales mix, new video game hardware sales declined 7.9% to $359.2 million while new video game software sales were down 10.3% to $466.7 million. Difficult year-over-year comparisons dented sales in both the categories. More specifically, sales in both the categories were hampered by the launch of the Nintendo Switch in the year-ago quarter.  Likewise, software sales were impacted by the launch of strength of titles across platforms in the prior fiscal. 

Also, pre-owned and value video game products sales came in at $495.7 million, down 5.8% year over year. Worldwide omnichannel sales declined 46% owing to limited allocation of the Nintendo Switch at launch.

However, Video game accessories sales jumped 13.1% to $199.1 million. Also, non-GAAP digital receipts increased 16.2% to $273.7 million, while GAAP digital sales declined 2.5% to $43 million.

Technology Brands sales were down 16.1% to $169 million due to overlap in AT&T’s dealer compensation structure and lower promotional activity.

Nevertheless, Collectibles sales surged 24.4% to $142.4 million buoyed by continued expansion of licensed merchandise offerings and unique product offerings.

Gross profit decreased 6.4% to $657.3 million owing to lower net sales. Further, gross margin contracted 30 basis points (bps) to 34%.

SG&A expenses inched up 0.5% to $566.1 million in the reported quarter. Adjusted operating income declined 35.7% to $69.7 million, while adjusted operating margin contracted 160 bps to 3.6%.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $247.2 million, net receivables of $156.4 million, net long-term debt of $818.6 million and shareholders’ equity of $2,183.5 million.

For fiscal 2018, management maintains capital expenditure projection in the range of $110-$120 million.

Guidance

GameStop reaffirmed the fiscal 2018 guidance. The company continues to expect fiscal 2018 sales decline of 6% to 2% and comps are expected to remain flat or decline around 5%. For the year, management continues to project earnings per share in the range of $3-$3.35.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower.

GameStop Corp. Price and Consensus

 

GameStop Corp. Price and Consensus | GameStop Corp. Quote

VGM Scores

At this time, GME has a poor Growth Score of F, however its Momentum is doing a lot better with a B. The stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions indicates a downward shift. Notably, GME has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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