GameStop Earnings: Here’s What’s Likely to Happen

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Before market open on Thursday, March 28, GameStop will report its fiscal Q4 2012 (ending January) results, and host a conference call at 8:00am PT (webcast:

We expect GameStop (NYSE:GME) to report Q4 results in line with guidance. Our estimates are for revenue of $3.42 billion, comps of down 4.0%, and EPS of $2.09, vs. consensus for revenue of $3.45 billion and EPS of $2.09, and guidance for comps of down 7.0 – 4.0% and EPS of $2.07 – 2.27. GameStop expects EPS at the low end of the range, representing 20% growth over its most profitable quarter ever. According to NPD in Q4, industry console SW sales were down 17%, below our estimate for GameStop of down 7%, while HW sales were down 14%, below our estimate for GameStop of down 2%. We believe GameStop captured enough share to overcome sluggish Q4 sales and achieve its guidance. Digital and mobile growth, cost control, and repurchases should have enabled it to deliver in-line EPS.

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Holiday sales disappointed, but comps were within guidance. Holiday comps of down 4.4% were below our expectation of positive 0.9% and within Q4 guidance of down 7.0% to up 1.0%. Total sales were down 4.6% as declining store traffic offset solid Wii U sales. Margin from digital and lower promotional activity offset a shortfall in used game sales. New SW was down 5.1%, with new HW down 2.7%…

Our FY:13 EPS estimate, which represents 12% y-o-y growth, may be too conservative. A strong game lineup (including Battlefield 4, BioShock Infinite, and Grand Theft Auto V), new consoles (PS4 to be released for holiday 2013, with an Xbox launch expected around the same time), and share repurchases should drive EPS growth. High-margin digital and mobile sales growth should accelerate.

We do not expect the company to provide detailed FY:13 guidance yet, due to uncertainty over next-gen console pricing, allocations and timing. At a minimum, however, we expect the company to guide to full-year EPS growth, with detailed guidance coming after E3. GameStop shares should benefit from new console buzz until then. We do not expect the new consoles to block used gaming.

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. 

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