The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Revenue was better than expected, but still down year-on-year, despite an extra retail week. Revenue was $3.56 billion vs. our estimate of $3.42 billion and consensus of $3.45 billion. “Other” (primarily used electronics) was up ≈ $104 million, but did not fully offset declines for new hardware and new and used software.
EPS exceeded level implied by pre-announcement. Adjusted EPS was $2.16, compared with our estimate of $2.09, consensus of $2.09, and guidance of $2.07 – 2.27. When GameStop (NYSE:GME) reported holiday sales results in January, it disclosed that Q4 EPS was expected to come in at the low end of the guidance range of $2.07 – 2.27; however, management proved to be overly conservative. Despite continued industry weakness, Q4 EPS was up $0.43 year-on-year due to share buybacks ($0.26), an extra retail week ($0.08), and margin expansion and cost control ($0.09).
Conservative FY:13 EPS guidance does not include share repurchases. Initial EPS guidance is $2.75 – 3.15, implying a slight decline at the high end and a 7 percent decline at the midpoint after 10 percent growth in FY:12. However, assuming buy backs of 10 million shares in FY:13 (GameStop has $400 million remaining in its authorization), we estimate a pro forma range of $2.88 – 3.30, which implies 4 percent at the high end. Investors should view this as a positive given that gamers are likely to buy fewer games ahead of the holiday next-gen console launches. We note that management has a history of being overly conservative with guidance…
Our FY:13 EPS estimate, which is at the high end of the guidance range, may be too conservative. A strong game lineup (including Battlefield 4, BioShock Infinite, and Grand Theft Auto V), new consoles (PS4 released at holiday, with an Xbox launch expected around the same time), and repurchases should drive additional EPS growth. We are most optimistic about high-margin digital and mobile sales (28 – 30 percent margins). In our view, GameStop’s $184 million in mobile sales has barely scratched the surface of its potential in the category, and we expect growth of over $150 million from smart phone and tablet sales this year.
Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 9x our FY:14 EPS estimate of $3.70. 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 Securities.
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