GameStop will report holiday sales (9 weeks ending January 4) before market open on Tuesday, January 4. It will not host a conference call. We expect GameStop (NYSE:GME) to report holiday comps well above the high end of its Q4:13 comps guidance range of up 2-9 percent and the level we have modeled, up 10 percent.
We believe GameStop competed favorably for up to 50 percent domestic market share of the most high-profile software releases and two new next-gen consoles. Sony announced worldwide PS4 sell-through of over 4 .2 million consoles as of December 28, with over 9.7 million PS4 games sold (including digital). Microsoft announced Xbox One worldwide sell-through of over 3 million consoles before the end of 2013. We believe GameStop sold at least 1.8 million of the over 7.2 million next-gen consoles, and will sell another 300,000 before quarter end. We expect management to mention that Q4 EPS is trending towards the high-end of the guidance range of $1.97-2.14.
In our view, despite what is expected to be a strong holiday comps figure, a bullish raise to EPS guidance appears unlikely given mix shift, with more spending than usual on lower-margin hardware coupled with used uncertainty. In addition, management typically takes a conservative approach towards guidance, and the outlook for January remains uncertain. We believe GameStop has little risk of missing Q4 EPS guidance, however, due in part to a recently announced new $500 million share repurchase authorization. It is also worth noting that the company has now met or exceeded consensus EPS every quarter since Q2:10 (reported August 19, 2010).
The sell-off in GameStop shares from the announcement of Sony’s PS Now was likely overdone. We had expected Sony to announce a streaming gaming service ever since its acquisition of Gaikai in 2012. It is unclear which games will be available (we expect older first-party titles primarily) on the service, and unclear what Sony intends to charge for subs or for rental. Game streaming services have been unsuccessful in the past, as evidenced by the OnLive bankruptcy.
We are maintaining our FY:13 estimates until we learn more about the company’s holiday performance. We remain above guidance, and maintain our OUTPERFORM rating and 12-month price target of $60. Our PT is based on 14.5x our FY:14 EPS estimate of $4.15. Although many quality retailers trade at 20x EPS, GME faces headwinds from the transition to digital.
Michael Pachter is an analyst at Wedbush Securities.