GameStop isn’t Getting Help from This NPD Data: Deep Stock Analysis

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

We are lowering our Q3:12 revenue estimate to reflect NPD results for the first two months of GameStop’s (NYSE:GME) quarter. According to NPD, for the months of August and September, U.S. console software sales are down 16% y-o-y, with hardware sales down 39% y-o-y. We are maintaining our GameStop software sales growth estimate of down 11%, as we believe the retailer has gained significant share on the quarter’s high-profile releases. We are lowering our hardware estimate to down 35% from down 17%, slightly above NPD to reflect share gains. Our revised sales estimates caused us to lower our comps estimate to down 8%, compared to our prior estimate of down 5%, and guidance of down 10% to down 5%.

Despite a lower revenue estimate, we are maintaining our Q3 EPS estimate of $0.36. In our view, improved gross margin from mix shift (from hardware to highermargin digital and iDevices) was offset by greater marketing spending as a percentage of revenue. Our lower full-year revenue estimate of $8.94 billion (down from $9.00 billion previously) reflects revised Q3 assumptions, while our EPS estimate remains unchanged.

We expect initial demand for Wii U (scheduled for release on November 18) to be strong, benefiting Nintendo and GameStop. We expect 1 – 1.5 million Wii U units to be shipped into the U.S. by the end of GameStop’s fiscal year (January), with GameStop receiving an allocation of roughly 30%, or 300,000 – 450,000 units. At a $350 hardware price point, and a software price point of $60 with an attach rate of one, we believe the Wii U launch will generate revenue of around $120 –180 million for GameStop, representing approximately 3 – 5% of sales.

Implied Q4 EPS guidance of $2.04 – 2.32 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 Wii U. 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.