GameStop Corp. (GME, Financial) is scheduled to report its first quarter results for fiscal 2015 on May 28. The company competes with other retailing giants such as Amazon.com Inc. (AMZN, Financial), Wal-Mart Stores Inc. (WMT, Financial) and Best Buy Co. Inc. (BBY, Financial) in the consumer electronics marketplace.
The video game and entertainment software retailer reported lower-than-expected fourth-quarter results for fiscal 2014 owing to disappointing hardware sales and negative foreign currency headwinds. GameStop’s Q4 adjusted earnings of $2.15 a share missed the consensus estimate by 2 cents, but grew 13.2% year-over-year. At the same time, revenues for the quarter came in at $3.47 million, missing the consensus estimate of $3.65 billion and declining 5.6% year-over-year. Moreover, consolidated comparable-store sales dropped 1.8% year-over-year, with revenues from new gaming hardware falling 30.2%. However, new gaming software saw growth in sales of 6.1% year-over-year. Following the results, GameStop projected sales growth in the range of -2% to 1% while comparable-store sales was expected to grow in the 2.5-5.5% range. GameStop also forecast earnings of $0.53-$0.60 a share for Q1 2015 and $3.60-$3.80 a share for the full fiscal 2015. Shares of GameStop are up 8.3% since the company’s last earnings report.
Earnings, Revenue Growth Likely to be Flat Year-over-year
While GameStop’s Q4 2014 results had to face tough sales comparisons with the prior-year quarter that saw the launch of Sony’s (SNE, Financial) Playstation 4 and Microsoft’s (MSFT, Financial) Xbox One, the going would be a bit easy for Q1 2015. Further, recent industry reports suggested that after lackluster sales in March, April 2015 saw a 13% year-over-year sales growth in physical handheld and console video game software. However, GameStop is grappling with the paradigm shift in the gaming industry, which is moving towards online streaming and away from brick and mortar stores. While the company has so far been able to hold its own, primarily through a customer loyalty program that helps retain a steady customer base, investments to tap the new market scenario would be required to ensure that GameStop’s business remains relevant in the years to come. At the same time, negative foreign currency headwinds continue to persist, and are likely to make their impact felt in the company’s Q1 results.
On the other hand, with used games being one of the better profit drivers for GameStop, a continued increase is likely to be seen in this segment during Q1 2015 as Playstation4 and Xbox One games reach the refresh times in their product cycle. Experts also see the company’s new TechBrands segment contributing significantly to operating profits through the fiscal year. Further, while sales of full game downloads are on the rise, GameStop’s Downloadable Content segment is likely to drive digital sales for the quarter. At the same time, GameStop has been actively rewarding shareholders through its dividend and share buyback programs. For instance, during Q4 2014, GameStop bought back shares worth $61.7 million, paid quarterly dividend of $0.36 a share and went on to its annual dividend by 9% to $1.44 a share. This, combined with the company’s beat down multiple, makes it an attractive short to mid-term option for investors. Consensus estimates peg GameStop’s Q1 earnings to come in at $0.59 a share on revenues of $2.01 billion, almost flat on a year-over-year basis. However, bigger gains are expected for 2016 and 2017 with projected earnings of $3.82 and $4.37 a share respectively.
Final Thoughts
While the weak fourth quarter performance by GameStop was mostly a hangover from the unusually robust hardware sales in Q4 2013 that saw the launch of new generation gaming consoles from Sony and Microsoft, Q1 2015 will benefit from the absence of such stark comparisons. With industry reports suggesting a recent trend reversal in sales of physical consoles and gaming software, sales are expected to have picked-up during the quarter. The company also continues to reward shareholders with high dividends and share buybacks, a point that will please investors. Further, analysts at Oppenheimer have reiterated their ‘Outperform’ rating on the company’s stock. While GameStop shares have mostly traded in the $37-$41 range in the last three months, the company’s stock carries a price estimate of $40.34 a share, and a ‘buy’ guidance for the short to mid-term.
