Thursday, March 17, 2011

GameStop Corp. (NYSE: GME): Q4 Earnings Preview 2010

GameStop Corp. (NYSE: GME), the world's largest video game retailer, is scheduled to release fourth quarter earnings before the opening bell on Thursday, March 24, 2011. Analysts, on average, expect the company to report earnings of $1.56 per share on revenue of $3.71 billion. In the year ago quarter, the company reported earnings of $1.29 per share on revenue of $3.52 billion.

GameStop Corp. 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. GameStop's retail network and family of brands include 6,606 company-operated stores in 17 countries worldwide,, a leading browser-based game site with more than 10 million monthly unique visitors, and Game Informer(R) magazine, the leading multi-platform video game publication. The used game business is the biggest source of GameStops’ profits and is a high margin business.

In the preceding third quarter, the Grapevine, Texas-based company's net income was $54.71 million or $0.36 per share, compared with a profit of $52.23 million or $0.31 per share in the prior-year period. Excluding debt retirement costs, earnings per share for the third quarter were $0.38. Revenue increased 3.5% to $1.90 billion from $1.83 billion last year. Analysts, on average, expected the company to report earnings of $0.37 per share on revenue of  $1.95 billion.

At its last earnings call in November, GameStop forecast fourth-quarter earnings per share in a range of $1.53-$1.59, representing an increase of 19% to 23% over the prior-year quarter. The company said that it expects comparable store sales for the quarter to range increase 2.0% to 4.0%.

GameStop also raised its fiscal 2010 earnings per share outlook to a range of $2.63-$2.69 from the prior range of $2.58-$2.68. The revised outlook represents a 16%-19% increase over the prior year. However, the company maintained its full-year comparable store sales guidance range of flat to up 2%.

The company has benefited from strong holiday season. The holiday period is important for the video game industry, with companies bringing in as much as 40 percent of their annual revenue in November and December.In January, GameStop reported record sales results for the nine-week holiday period ended January 1, 2011. Total sales for the period were $3.02 billion, a 5.4% increase as compared to the 2009 holiday sales period, with comparable store sales increasing 3.4%. GameStop also produced 32% growth in gift card sales in December. The company also reaffirmed its previously announced fourth quarter and full year 2010 earnings per share guidance. Paul Raines, Chief Executive Officer, commented, "GameStop exceeded its holiday sales plan based on the strength in Kinect hardware and new software sales driven by core titles. Tony Bartel, President, added, "Over the holiday, GameStop reaped the benefits of its investment in e-commerce. sales rose more than 100% versus last year, far outpacing online industry growth during the period, remaining the fastest growing website in the video game space."

CEO Paul Raines said in January that Kinect sales would continue to be strong this year and that Sony's marketing for its motion-sensor controller the Move, as well as new games like Electronic Arts' "Tiger Woods PGA Tour 12" focusing on the Masters golf tournament, would sustain the momentum of motion-sensor gaming. The companyt expects Nintendo's 3DS, a handheld device scheduled to be launched in the United States in late March, to be a hit.

GameStop has faced increasing competition with used game trade-in programs at competitors like (NASDAQ: AMZN), Best Buy (NYSE: BBY) and Wal-Mart Stores Inc (NYSE: WMT), as well as a growing digital distribution model favored by publishers. The recent technological advancements has made the gaming industry highly aggressive as the buyers now have multiple options to obtain video game accessories and softwares for gaming systems and computers. There are concerns that GameStop’s model may be in trouble with the possibility of digital downloads grabbing an every larger slice of market share. Companies like Activision (NASDAQ: ATVI) and Electronic Arts (NASDAQ: ERTS) are in the process of trying to cut out the middleman with direct downloads that will allow customers to buy the game online or through a gaming system. 

During the quarter in review, the company's Board of Directors authorized $500 million in additional funds for its share and debt repurchase program. This authorization replaced the $300 million plan announced in September 2010.

The company's stock currently trades at a forward P/E (fye 30-Jan-12) of 7.22 and PEG Ratio (5 yr expected) of 0.60. In terms of stock performance, GameStop shares are up nearly 6% over the past year.

Full Disclosure: None.
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