Saturday, November 14, 2009

GameStop Corp. (NYSE: GME): Third Quarter Earnings Preview 2009

GameStop Corp.(NYSE: GME) is scheduled to release its third quarter financial results before the market open on Thursday, November 19, 2009. Analysts currently expect the company to report earnings of 30 cents per share on revenue of $1.73 billion. In the year ago period, GameStop reported earnings of 38 cents a share on revenue of $1.70 billion.

GameStop Corp. is the world's largest video game retailer. It sells new and used video game hardware; video game software; video game accessories, including controllers, memory cards, and other add-ons; PC entertainment software etc. As of January 31, 2009, GameStop Corp. operated 6,207 stores primarily under the names GameStop and EB Games that are located in regional shopping malls and strip centers in the United States, Australia, Canada, and Europe.

In August, the Grapevine, Texas-based company reported that its second-quarter profit plunged 32.3% due to lower new console unit sales and a lack of strong new software titles. Second-quarter net income declined to $38.7 million, or 23 cents per share, from $57.2 million, or 34 cents, in the prior-year quarter. Quarterly sales slipped 3.7% to $1.74 billion from the previous year's sales of $1.80 billion. Analysts, on average, expected the company to report earnings of 28 cents per share on revenue of $1.75 billion for the quarter.

Despite gaining over 200 basis points in new video game market share during the quarter, comparable store sales fell 14.1%. Gross margins increased by 170 basis points, as product mix shifted from low margin hardware sales to higher margin software sales. Early in November, the company reaffirmed its earnings forecast for the third quarter in a range of 27 cents to 33 cents per share, excluding debt retirement costs of $0.01 per share. The company also maintained its forecast for comparable store sales for the third quarter to decline in a range of 6% to 11%.

For the fourth quarter, the company anticipates earnings in a range of $1.47 to $1.65 per share, higher than $1.39 posted in the prior-year fourth quarter. Comparable store sales are projected to decline between 1.0% and 7.0%. For full year 2009, the company expects earnings to range between $2.40 and $2.64 per share, with a comparable store sales decline of 4.0% to 8.0%.

GameStop dominates the lucrative used-game market. The video game retailer's gross profit margin for used games is nearly 50 percent, compared to around 20 percent for a new game sale. During the second quarter, used video game products accounted for 32.3% of the company's total sales. Though overall video game industry could not escape unscathed from recession, sales of used video game witnessed unprecedented growth as bargain-hunting consumers slashed entertainment spending. During second quarter, sales of used video game products at GameStop surged to $560.8 million from the previous year's sales of $471.5 million.

The company is also expected to benefit from the release of highly-anticipated title releases such as Call of Duty: Modern Warfare 2, Assassin's Creed 2 and Halo 3: ODST during the third quarter. Activision’s brand-new Call of Duty 2: Modern Warfare, which hit store this week, shattered the previous record for opening-day sales by an entertainment property, earning $310 million in North America and the U.K. alone. Moreover, recent industry hardware price cuts too are expected to boost overall video game sales. Console makers Sony (NYSE: SNE), Microsoft (NASDAQ: MSFT), and Nintendo all slashed the prices of their systems by $50 to $100 in third quarter.

GameStop has continued with its aggressive worldwide expansion plans and expects to open between 75 and 100 stores with a goal of around 400 new stores for the year. During the quarter, GameStop opened 110 new stores with a goal of around 400 new stores for the year. Late last month, GameStop announced plans to hire about 15,000 seasonal part-time game advisers between now and December 24, 2009, in order to manage the upcoming holiday rush.

U.S. video game industry sales dropped in October, declining 19 percent from a year earlier, and 16.4 percent from September, according to data released by the NPD Group. Though the $1.07 billion in total sales turned in by the industry in October were paltry, compared with $1.32 billion in October 2008 and $1.28 billion in September 2009, it was still the third-best October sales report turned in by the video game industry, NPD analyst Anita Frazier noted in her monthly report.

Investors are expected to focus on management's commentary about holiday sales outlook and store traffic expectations. The Friday after the Thanksgiving holiday marks the start of the crucial holiday shopping period. Video game industry rakes in close to two-thirds of their annual revenue during holiday season.

In terms of stock performance, GameStop shares have gained 2% since the beginning of the year. Shares of the company fell 93 cents or 3.78% to close at $23.69 on Friday.

Full Disclosure: None.
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