GameStop (GME) Q3 Earnings Top, Raises Comps View, Stock Up

GameStop Corp. GME reported robust third-quarter fiscal 2017 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate. However, the big take away from this quarter was that earnings improved year over year after witnessing a decline in the trailing two quarters.

The company’s shares, which have witnessed a sharp decline of 26.2% in the past six months, underperforming the industry’s gain of 8.1% took a sharp U-turn following the result. The stock gained 7.6% during the after-hour trading session on Nov 21.

The company recorded adjusted earnings of 54 cents per share that comfortably beat Zacks Consensus Estimate of 43 cents and also increased 10.2% from the year-ago period. Net sales were up 1.5% year over year to $1,988.6 million and surpassed the consensus estimate of $1,958 million.

The company’s sales were driven by robust demand for Nintendo Switch along with collectibles and software. International sales were also strong during the quarter. The company stated that new console hardware as well as collectibles will drive holiday season results. Further, the company expects robust demand for Nintendo Switch during the holiday season.

Let’s Delve Deep

Consolidated comparable store sales (comps) increased 1.9%, reflecting a gain of 4.6% at international locations and 0.6% at domestic locations.

By sales mix, new video game hardware sales jumped 8.8% to $309.5 million, while new video game software sales increased 5.4% to $649.9 million. Moreover, pre-owned and value video game products sales came in at $458.5 million, down 2.4% year over year. Increase in new hardware sales were driven by solid demand for Nintendo Switch, while new software sales increased on account of robust title lineup.

During the holiday season, the company anticipates robust demand for Nintendo Switch and the Microsoft’s Xbox One X, which will drive hardware sales. However, the company anticipates earnings from Technology brands in fiscal 2017 to be the range of $75-$90 million, down from the prior estimate of $120 million due to shortage of iPhone 10 supply, which has impacted the traffic.

Video game accessories sales were down 12.6% to $136.4 million. Non-GAAP digital receipts increased 1.8% to $263.7 million, while GAAP digital sales slumped 16.8% to $37.2 million.

Technology Brands sales were down 10.2% to $194.2 million due to delay in the release of Apple’s iPhone X and also due to alteration in AT&T’s dealer compensation structure. Further, the company stated that performance of Technology Brands in the fourth quarter will mostly depend on the availability of iPhone X. Collectibles sales surged 26.5% to $138.4 million buoyed by both domestically as well as internationally growth of licensed merchandise offerings.  

GameStop expects to enhance collectibles business to approximately $650-$700 million during fiscal 2017 and anticipates becoming a $1 billion business by the end of fiscal 2019. Earlier, management had stated that it remains optimistic about non-physical gaming businesses and expects this category to reach approximately 50% of operating earnings by the end of fiscal 2019.

During the reported quarter, gross profit decreased 2.7% to $689.4 million, while gross margin contracted 140 basis points (bps) to 34.7%. Adjusted operating income declined 18.2% to $80.8 million, while adjusted operating margin shriveled 90 bps to 4.1%.

Store Update

In the reported quarter, GameStop shuttered a net of 18 video game stores globally, ending the year with 3,869 video game stores in the United States and 1,985 internationally. The company closed three net technology brands store and now has 1,506 stores. The company opened three collectible stores during the quarter and now has 102 stores.

Gamestop Corporation Price, Consensus and EPS Surprise

Gamestop Corporation Price, Consensus and EPS Surprise | Gamestop Corporation Quote

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $454.7 million, net receivables of $195.8 million, long-term debt of $817.2 million and shareholders’ equity of $2,313.7 million.

Guidance

For the fiscal year, management reiterated earnings outlook of $3.10-$3.40 per share. The current Zacks Consensus Estimate for fiscal 2017 is pegged at $3.30. However, GameStop expects comps in fiscal 2017 to rise in the low to mid-single digits, compared with the earlier estimate of high-end of down 5% to flat.

GameStop currently carries a Zacks Rank #4 (Sell), which is subject to change following the earnings announcement.

3 Retail Stocks Likely to Steal the Show

Some better-ranked stocks worth considering from the retail space are American Eagle Outfitters, Inc. AEO, Boot Barn Holdings, Inc. BOOT and The Buckle, Inc. BKE, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Eagle Outfitters delivered an average positive earnings surprise of 3.9% in the trailing four quarters and has a long-term earnings growth rate of 8.7%.

Boot Barn Holdings has an impressive long-term earnings growth rate of 15.7%.

Buckle delivered an average beat of 3.8% in the last four quarters.

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