Revealed: GameStop Holiday Sales Results

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

Before the market open on Tuesday,  GameStop (NYSE:GME) reported holiday sales results (9-week period ending December 29) well below our expectations. Comps were down 4.4% (3.5% domestic, 6.4% int.’l),  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 (320,000 HW units sold). Margin contribution from digital (up over 40%) and lower promotional activity offset a shortfall in used sales (down 15.6%).  New SW sales were down 5.1% and new HW sales were down 2.7%.

Comps guidance narrowed towards low-end of the range. GameStop adjusted comps guidance for Q4 to down 7.0 – 4.0% from down 7.0% to up 1.0%, and for FY:12 to down 9.0 – 7.5% from down 9.0 – 6.0%.

GameStop maintained its Q4 EPS guidance range despite sluggish demand for high-margin used products. Q4 EPS is expected to come in at the low end of the range of $2.07 – 2.27 even though used sales were down almost $100 million y-o-y (representing an estimated EPS hit of almost $0.25 alone). This reflects strong financial discipline (less promotional activity as it refused to sacrifice margin) and the positive impact of repurchases ($11.7 million of stock, or 458,000 shares for an average price of $25.51 over the holiday period). At the low end of guidance, Q4 EPS still represents 20% growth over its most profitable quarter ever.

GME

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Lowering our Q4:12 estimates, but maintaining FY:13 estimates. Lowering our FY:12 estimates for revenue to $8.75 billion from $8.92 billion, for comps to down 7.6% from down 5.6%, and for EPS to $3.12 from $3.25. Maintaining FY:13estimates for revenue of $9.30 billion and for EPS of $3.50.

Our FY:13 EPS estimate, which represents 12% y-o-y  growth, may be too conservative. Share repurchases and a much stronger game lineup (Q1 releases expected to include  BioShock Infinite, Crysis 3,  Dead Space 3,  Gears of War: Judgment, with Grand Theft Auto V in Q2) should drive EPS growth. New consoles are expected from Sony (late 2013) and Microsoft (NASDAQ:MSFT) (YE 2013 or early 2014).

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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