Game Stop Earnings Preview: Analyst Review

Before the market open on Thursday, November 17, GameStop (NYSE:GME) will report Q3:11 (ending October) results, and host a conference call at 8:00am PT (877-857-6151, passcode 6934046 or at http://investor.gamestop.com).

Lowering Q3 revenue estimates, maintaining EPS. According to NPD, fiscal Q3 hardware and software sales were down 8.4%, below GameStop’s comps guidance of up 2.0 – 4.0%. While we think GameStop gained market share (adding ≈ 2 – 4% to comp) and benefited from growth in digital by ≈ $30 – 50 million year-over-year (adding another 1.5 – 2.5% to the comp), weak industry software sales in Q3 and console price cuts likely offset a strong game release schedule. Therefore, we are lowering our Q3 estimates for revenue to $1.92 billion from $1.99 billion, for comps, to 0% from 4%. We are maintaining our EPS estimate of $0.41, as we believe PowerUp Rewards likely contributed to margin expansion, and we believe the company repurchased shares in Q3. GameStop guided to EPS of $0.38 – 0.41 (including a $0.03/share impact from strategic investments).

GameStop should report Q3 results in line with our revised estimates for revenue of $1.92 billion, comps of 0%, and EPS of $0.41 vs. consensus for revenue of $1.96 billion and EPS of $0.37. Our estimates reflect over-indexing on HD console units, digital growth, and gains from PowerUp Rewards, offset by lower hardware dollars (from price cuts) and difficult used comps (from the PowerUp Rewards rollout last year). Overall, we estimate GameStop comped down 4.0% in new software, up 16.3% in used, and down 8.0% in hardware. The company should see contribution from 3DS and Kinect, both unavailable in Q3 last year.

We expect the company to lower FY:11 revenue and comp guidance, but expect it to maintain EPS guidance of $2.82 – 2.92. Although Q3 top-line results will likely be below guidance, Q4 looks very strong, and the company has the ability to cut spending on new initiatives and repurchase additional shares. Also, November has one of the best release lineups in history, including Call of Duty: Modern Warfare 3, Uncharted 3, Assassin’s Creed Revelations, Saint’s Row the Third, Elder Scrolls Skyrim, and Need for Speed The Run, as well as Star Wars: The Old Republic MMO to be released on December 20.

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 improved growth potential from continued market share gains, high-profile 2011 hardware and software releases, and digital growth.

Michael Pachter is an analyst at Wedbush Morgan.