GameStop Earnings Analysis: Digital is Bright, But These Metrics Suck
GameStop (NYSE:GME) Q1 results were in-line with preannouncement. Revenue was $2.00 billion, vs. our estimate of $2.02 billion, and consensus of $2.05 billion. Same store sales were down 12.5% due to slower new physical software and console sales, in line with our estimate and the preannounced amount. EPS was $0.54, in line with our estimate, consensus, and the preannounced amount. The company was able to meet its EPS target due to margin expansion from pre-owned, mobile, and digital.
Continued market share gains. GameStop’s (NYSE:GME) April quarter sales growth for new hardware and new software outperformed the industry domestically once again, with new hardware sales down 19% (better than the industry’s down 28%) and new software down 20% (better than the industry’s down 29%). The company estimates a 160 basis point increase in its new software market share in the U.S. in Q1.
Weak Q2 guidance. Initial Q2 guidance is for comps of down 11.0 – 5.0% (below our prior estimate of up 5.5%) and EPS of $0.10 – 0.18 (below our prior estimate of $0.30). The company also lowered FY:12 guidance for comps to down 5% to flat from down 1.5% to up 2.0%, but reiterated guidance for EPS of $3.10 – 3.30. The weak sales trends that negatively impacted Q1 results are clearly expected to continue throughout the second quarter, with performance improving in 2H:12.
Strong growth for new business initiatives. Digital revenues were up 23% in Q1:12, with console digital up 17% and PC digital up 38%, and the company is on track to achieve its annual digital revenue goal of $675 million. GameStop expects $150 – 200 million of mobility revenue this year ($12 million in Q1) at a 30% operating margin. iDevice trades have accounted for 8% of all trade transactions year-to-date and represent 10% of trade dollars received each week.
Strong used video game products gross margin, which increased to 49.1% in Q1:12 from 48.0% in Q1:11. The company attributed the increase primarily to improvements in margins in most countries. We believe the increased gross margin is a reflection of limited promotional activity in the quarter, suggesting that the strength of GameStop’s used business has increased as the number of PowerUp Rewards members has grown and competition has declined.
Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 9x our FY:13 EPS estimate of $3.60. 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.