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What’s the New Answer for GameStop Corp. (NYSE:GME)?

GameStop Corp. (NYSE:GME), the video game and consumer electronic retailer, opened more than 11% lower on the final trading day of November after the company trimmed fiscal 2018 guidance and forecasted lower than expected fourth quarter earnings in reaction to sales skewing more heavily toward hardware than initially planned.

The stock suffered from a lowered view forward, which cast a dark shadow over what was actually a relatively promising Q3 set of data: Q3 earnings, excluding some non-operating impairment charges, were $0.67 per share; GAAP earnings were $0.59 per share; gross margins were down 160 basis points to 33.1%. That last point was primarily due to the growth in the sales of lower-margin categories.

GameStop Corp. (NYSE:GME) noted total global Q3 sales up 4.8% (increased 6.3% in constant currency) to $2.08 bln, resulting in better than expected consolidated comparable store sales increase of 2.1% (3.4% increase in the U.S. and 0.5% decrease internationally).

Management highlighted that the increase in Q3 comp sales was driven by a stronger software line up this quarter, including several marquee titles that were released earlier in the calendar compared to last year. By segment: new hardware sales grew 12.8%, driven by demand for Xbox One X (MSFT) and Sony PS4 (SNE), which was partially offset by a decrease in Nintendo Switch (NTDOY), as the anniversary of last year’s launch of that title came and went in the spring.

New software sales increased 10.9%, driven by the strong slate of titles that launched during the quarter. Accessories sales increased 32.6% on the strength of headset and controller sales.

Pre-owned sales declined 13.4%. The company continued to see declines in pre-owned software, reflective of fewer title launches and a decline in physical software sales earlier in 2018, which affect inventory levels; weakening demand in the face of digital adoption, including digital access to older titles; and fewer promotions offered to customers in the quarter.

In addition, digital receipts were up 29.5% to $341.6 mln, driven mostly by strength in sales of digital currency.

Collectibles sales increased 11.7% to $154.6 mln due to continued growth in both GME’s domestic and international collectibles business.

 

The View Ahead

According to management, the company updated its previously issued annual guidance for fiscal 2018 based on current sales and margins trends: GME’s guidance includes the expected results of the spring Mobile business, which the company anticipates will be classified as discontinued operations in the fourth quarter and for fiscal 2018.

GameStop now sees FY18 EPS in the range of $2.55-2.75, down from the prior expectation of $3.00-3.35. The company reaffirmed total sales guidance of -2.0% to -6.0% as well as comparable store sales (excluding Tech Brands stores) between flat to -5%. What’s more, free cash flow for the year is now expected to be $200 mln compared to the $300 mln anticipated earlier.

Beside the raw past and future data, the company also noted that it was continuing to review strategic alternatives. The company is also working to find a new CEO – as you may recall, back in May, CEO Michael Mauler resigned from his post citing personal reasons only three months after taking the job. Following the departure, Board of Directors member Shane Kim was named interim CEO while Rob Lloyd was concurrently appointed to the positions of COO and CFO.

Frankly, the combination doesn’t look entirely reassuring, and it isn’t hard to understand why shares dropped sharply.

Hence, the market was able to relatively easily look past strong data for last quarter and still wring out the shares off the report.

GameStop Corp. (NYSE:GME) trumpets itself as a company that operates as a multichannel video game, consumer electronics, and wireless services retailer.

It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands.

The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software.

It also sells wireless products, services, and accessories; collectibles, such as licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes; gaming-related print media, and mobile and consumer electronics products; PC entertainment software in various genres comprising sports, action, strategy, adventure/role playing, and simulation; and carry strategy guides, magazines, and interactive game figures.

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