Before market open on Tuesday, GameStop (NYSE:GME) reported holiday sales results (9-week period ending January 4) that reflected a mix of sales below our bullish expectations. Comps were up 10.2 percent, slightly above our Q4 estimate of up 10.0 percent and Q4 guidance of up 2 – 9 percent. However, we expected holiday comps well above the high-end of the Q4 guidance range driven by high share of the two next-gen consoles, with only modest declines for current generation software.
New hardware was up 99.8 percent, reflecting solid share gains, but new software was down 22.5 percent, leading to the disappointment. GameStop attributed the weak new software sales to greater-than-expected declines for PS3 and Xbox 360 software. The combination of new hardware strength and new software weakness hurt profitability, with lower EPS guidance. The margin on new software is around 21 percent, while the margin on new hardware is below 9 percent. The mix shift was $200 million greater than we modeled, resulting in gross profits of around $25 million ($0.13 in EPS) below our estimate. EPS guidance was lowered to $1.85 – 1.95 from $1.97 – 2.14 for Q4 and to $2.96 – 3.06 from $3.08 – 3.25 for FY:13.
Adjusting estimates to reflect mix shift. For FY:13, increasing our revenue estimate to $9.21 billion from $9.20 billion, but lowering our EPS estimate to $3.07 from $3.31. For FY:14, increasing our revenue estimate to $9.82 billion from $9.75 billion, but decreasing our EPS estimate to $4.02 from $4.15.
GameStop holiday results suggest that December NPD console/handheld software sales will be well below our estimate of down 1 percent year-over-year. November software sales were down 24 percent. Factoring in GameStop’s new software sales decline of 22.5 percent, including December, we now expect December NPD to likely be down well over 25 percent. We believe a figure in this range has the potential to hurt the shares of the covered publishers. Share repurchases continued. GameStop spent $39.5 million (800,500 shares at an average price of $49.39), compared to $94.4 million in Q3 and $88.9 million in Q2. The company has $467 million remaining in its authorization.
We are maintaining our OUTPERFORM rating and 12-month price target of $60. Our PT is based on 15x our FY:14 EPS estimate of $4.02. Although many quality retailers trade at 20x EPS, GME faces headwinds from digital and the impact of the next-gen console transition on current-gen sales.
Michael Pachter is an analyst at Wedbush Securities.