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GameStop (GME) Down 16.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for GameStop (GME - Free Report) . Shares have lost about 16.1% in that time frame, underperforming the S&P 500.

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

GameStop Q3 Earnings Beat Estimates, View Cut

GameStop reported impressive third-quarter fiscal 2018 results, wherein both top and bottom line exceeded the Zacks Consensus Estimate and improved year over year. However, management’s trimmed outlook for the fiscal year displeased investors.  

Furthermore, 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 fewer promotions offered to customers in the reported quarter.

GameStop, which is holding exploratory talks related 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.

Notably, the company’s decision to divest the Spring Mobile business is part of its comprehensive review process as GameStop is consistently looking 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. GameStop plans to use the net proceeds from the sale to lower debt, reinvest in core video games and collectibles businesses, and fund share repurchases.

Q3 Performance

In the quarter under review, adjusted earnings increased 24.1% year over year to 67 cents per share. The reported figure also 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 trumped the Zacks Consensus Estimate of $2,041 million, marking two consecutive beats.

Consolidated comparable store sales (comps) rose 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 performance in this quarter, including several marquee titles that released earlier than expected.

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. Software sales growth can mainly be attributed to a strong slate of titles that was launched during the reported quarter.  

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

However, pre-owned and value video game products sales totaled $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 figure registered last year. 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. While adjusted operating income rose 16.3% to $94 million, adjusted operating margin expanded 40 bps to 4.5%.

Other Financial Aspects

GameStop 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 Dec 21, 2018, to its shareholders of record as of Dec 11, 2018.

For fiscal 2018, management lowered its capital expenditure projection to $100-$110 million from $110-$120 million anticipated earlier.

Guidance

Although GameStop delivered better-than-expected quarterly results, it trimmed the fiscal 2018 guidance. For the fiscal year, management now envisions earnings per share of $2.55-$2.75, down from $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%, while comps are expected to remain flat to negative 5%.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -21.11% due to these changes.

VGM Scores

Currently, GameStop has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

GameStop has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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