Game Stop Analyst Earnings Recap

GameStop’s (NYSE:GME) Q3 earnings were roughly in-line with our revised expectations. Revenue was $1.95 billion, compared with our estimate of $1.92 billion and consensus of $1.96 billion. Same store sales were down 0.6%, compared with our estimate of 0.0%, and guidance of up 2.0 – 4.0%. EPS was $0.39, compared with our estimate of $0.41, consensus of $0.37, and guidance of $0.38 – 0.41. Sales growth for new hardware and software was better-than-expected, while used software was below our expectations.

The company lowered FY:11 guidance for revenue to $9.7 – 9.8 billion (up 2.0 – 3.0%) from $9.9 – 10.1 billion (up 4.5 – 6.5%), and for comps to down 1% to flat from up 1.0 – 3.0%, but maintained EPS guidance of $2.82 – 2.92.

Lowering our FY:11 estimates for revenue to $9.73 billion from $9.76 billion, for comps to -0.1% from +0.4%, and for EPS to $2.93 from $2.96 to reflect Q3 results and guidance. Maintaining our FY:12 estimates for revenue of $9.98 billion and EPS of $3.30, but raising our comps estimate to +2.4% from +1.8%.

Continued market share gains. NPD data showed new hardware sales down 5.5% in the quarter, and new software sales down 9.9%. GameStop gained significant share, with new hardware sales up 0.6%, and new software sales up 4.8%. We expect the gains to continue in Q4 due to very strong releases.

Lower-than-expected used sales. Used sales were up 3.1% in Q3, well below our 16.3% estimate. We expected trade-in promotions to drive disproportionate sales growth, but it appears that used will track new sales going forward.

We expect the recent rebound in software sales growth to continue, driving software comps for FY:12. Industry hardware and software sales trends have recently improved, and the company’s comps should benefit for the next year or so. In our view, hardware sales are likely to improve further when Microsoft (NASDAQ:MSFT) drops the price of the Xbox 360 (particularly the more affordable stand-alone versions), compounding the benefit from recent price cuts for the PS3 and 3DS.

$500 million stock and debt buyback should be hugely accretive. The company’s board increased its buyback authorization to $500 million from $180 million. A full exercise at mid-year would grow earnings by $0.22/share.

Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 10x our FY:12 EPS estimate of $3.30. Our price target reflects GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth, and its repurchase program.

Michael Pachter is an analyst at Wedbush Morgan.

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