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GameStop (GME) Q3 Earnings Beat, Stock Down on View Cut

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GameStop Corp. (GME - Free Report) reported third-quarter fiscal 2018 results, wherein both top and bottom lines came ahead of the Zacks Consensus Estimate and improved year over year. The solid performance was however not enough to placate investors, who seem to be let down by management’s trimmed outlook for fiscal 2018. Markedly, shares of the company lost more than 12% in the after-market trading session on Nov 29.

This video game retailer is grappling with softness in used games or pre-owned software due to the launch of fewer titles, decrease in physical software sales, muted demand owing to digital access to older titles and less promotions offered to customers in the reported quarter.

GameStop, which is holding exploratory talks relating to a potential transaction, recently entered into a deal to sell Spring Mobile business for $700 million in cash. Prime Communications is the buyer of the mobile division, which operates and owns 1,289 AT&T wireless stores.

The decision to divest the Spring Mobile business is part of the company’s comprehensive review process as it continues to look for strategic alternatives to boost shareholder value. This move will generate immediate cash flows, enabling the company to focus on its core businesses of video games and collectibles. The company plans to use the net proceeds from the sale to lower debt, reinvest in core video games and collectibles businesses, and fund share repurchases.

Shares of this Zacks Rank #3 (Hold) stock have increased around 10.2% in the past three months against the industry’s 16.2% decline.



Q3 Performance

In the quarter under review, adjusted earnings per share increased 24.1% year over year to 67 cents. Further, it surpassed the Zacks Consensus Estimate of 56 cents, after missing the same in the preceding quarter.

Net sales improved 4.8% (up 6.3% on a currency-neutral basis) year over year to $2,084.4 million. Moreover, the top line was above the Zacks Consensus Estimate of $2,041 million, marking two consecutive beats.

GameStop Corp. Price, Consensus and EPS Surprise

Consolidated comparable store sales (comps) increased 2.1% attributable to a 3.4% increase in the United States and a 0.5% decline internationally. The increase in comps was driven by strong software in this quarter, including several marquee titles that released earlier than last year.

By sales mix, new video game hardware sales were up 12.8% to $349 million, while new video game software sales improved 10.9% to $720.7 million. Hardware sales were backed by the robust sales of Sony PS4 and Xbox One X. The increase in software sales can mainly be attributed to a strong slate of titles that launched during the reported quarter.  

Moreover, Video game accessories sales jumped 32.6% to $180.8 million. Also, digital receipts grew 29.5% to $341.6 million and digital sales increased 22% to $45.4 million.

However, pre-owned and value video game products sales were $396.9 million, down 13.4% year over year. Also, Technology Brands sales decreased 11.9% to $171.1 million.

Nevertheless, Collectibles’ sales rose 11.7% to $154.6 million, buoyed by continuous growth in domestic and international collectibles business.

Gross profit increased by 0.2% to 690.8 million compared with the last year’s reported figure. However, gross margin contracted 160 basis points (bps) to 33.1%.

SG&A expenses increased 0.3% to $566.6 million in the reported quarter. Adjusted operating income increased 16.3% to $94 million, while adjusted operating margin expanded 40 bps to 4.5%.

Other Financial Aspects

GameStop, which shares space with Best Buy (BBY - Free Report) , ended the quarter with cash and cash equivalents of $454.5 million. Also, it had net receivables of $157.5 million, net long-term debt of $471.2 million and shareholders’ equity of $1,565.1 million at quarter end.

On Nov 27, 2018, management declared a quarterly cash dividend of 38 cents per share, payable on Dec 21, 2018, to shareholders of record as of Dec 11, 2018.

For fiscal 2018, management lowered its capital expenditure projection to $100-$110 million from the previous guidance of $110-$120 million.

Guidance

Although the company delivered better-than-expected quarterly results, GameStop dropped its guidance for fiscal 2018. For the fiscal, management now envisions earnings per share in the band of $2.55-$2.75 down from a range of $3.00-$3.35 projected earlier.

The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $3.05. Nevertheless, the company continues to expect fiscal 2018 sales decline of 2-6% and comps are expected to remain flat to negative 5%.

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