GameStop Earnings Outlook: Video Game Analyst Sees Phenomenal Quarter Ahead

Before market open on Thursday, August 18, GameStop (NYSE:GME) will report Q2:11 (ending July) results, with a conference call at 8:00am PT (888-337-8168 passcode 1246993 or at http://investor.gamestop.com).

We are lowering our Q2 estimates. According to NPD, fiscal Q2 hardware and software sales were down 18%, well below GameStop’s (NYSE:GME) comps guidance of flat to -2%. While we think that the company gained market share, we are lowering our Q2 estimates for revenue to $1.69 billion from $1.82 billion, for comps to -7.0% from 0.1%, and for EPS to $0.23 from $0.24. GameStop guided to EPS of $0.20 – 0.23 (including a $0.04/share impact from investments).

GameStop (NYSE:GME) should report Q2 results in line with our lowered estimates for revenue of $1.69 billion, comps of -7.0%, and EPS of $0.23 vs. consensus for revenue of $1.83 billion and EPS of $0.21. Our estimates reflect market share gains from over-indexing on HD consoles, contribution from digital revenue growth, customer gains from its PowerUp Rewards program, and solid performance in used game sales. Overall, we estimate that GameStop comped down 10% in new software, down 7% in used, and down 6% in hardware. The company should see contribution from 3DS, Kinect (NASDAQ:MSFT) and Move, each unavailable in GameStop’s Q2 last year. We expect GameStop to achieve the high-end of its EPS guidance due to control over marketing spending and investment in its digital initiatives.

With a phenomenal October quarter ahead of the company, we expect it to maintain FY:11 guidance for revenue of $10.0 – 10.2 billion, comps of +3.5 – 5.5%, and EPS of $2.82 – 2.92. Despite a difficult Q2, GameStop is well positioned for a strong second half. Catalysts include key game releases — such as Activision’s (NASDAQ:ATVI) Call of Duty: Modern Warfare 3, Electronic Arts’ (NASDAQ:ERTS) Battlefield 3 and Star Wars: The Old Republic MMO, and Microsoft’s (NASDAQ:MSFT) Gears of War 3 — the recent 3DS price cut, and potential HD console price cuts.

Michael Pachter is a video game analyst at Wedbush Morgan.

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