IN-DEPTH STOCK ANALYSIS: GameStop’s Disappointments
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
GameStop (NYSE:GME) Q2 EPS was in line with guidance. Revenue was $1.55 billion compared with our estimate of $1.56 billion, and the consensus estimate of $1.61 billion. EPS was $0.16, compared with our estimate of $0.18, consensus of $0.15, and guidance of $0.10-0.18. Although gross margin exceeded expectations (due to the growth of digital and mobile, and a mix shift towards the “Other” category), SG&A was higher than expected, leading to lower EPS than we estimated, but in line with guidance.
The company decreased FY:12 comp guidance to down 10.0- 2.0% from down 5.0% to flat, but maintained guidance for EPS of $3.10 – 3.30. Maintained EPS guidance reflects continued margin expansion and cost control.
Weak Q3 guidance is below our prior expectations. GameStop (NYSE:GME) was quite conservative in its Q3 outlook, reflecting traffic declines. We believe the Q3 release schedule is quite strong, and includes high-profile incremental releases, and we think that low Q3 comp guidance suggests a heavy dependence on growth in Q4 in order to hit FY guidance. This may keep shares range-bound until after Q4.
Increased commitment to shareholder returns through an increased dividend and its share repurchase program. GameStop announced a 67% increase to the quarterly dividend, to $0.25 per share. In addition, it had $301 million available for share repurchases. At its current share price, we estimate that a full exercise would result in annualized accretion of roughly 15%. GameStop believes it is “early on in the dividend process,” potentially indicating further dividend increases in future periods. We believe GameStop could support an annual dividend of $2/share.
Implied Q4 EPS guidance represents 18-34% growth above its most profitable quarter ever. Q4 is expected to include the bulk of 2012’s most high-profile releases, as well as Nintendo’s Wii U, although assessing its prospects will be impossible with few details. The guidance reflects net income growth of approximately 10%, with share repurchases augmenting profitability further.
Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 9x our FY:13 EPS estimate of $3.50. 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.