Analyst: GameStop Could Be ‘Dominant Next-Gen Retailer’


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

Fourth-quarter results were in line with our expectations. Revenue was $3.68 billion, versus our estimate of $3.85 billion and consensus of $3.79 billion (our estimate was not adjusted for 14- versus 13-week quarter). Revenue upside from two new consoles, with comps up 7.8 percent, versus our estimate of up 10.2 percent and guidance of up 2 percent to up 9 percent. Non-GAAP earnings per share was $1.90, compared with our estimate of $1.97, consensus of $1.93, and guidance of $1.85-$1.95. Profitability was negatively impacted by mix. In addition, the extra week last year added 8 cents to EPS.

Fiscal year 2014 guidance exceeded our bullish expectations. Initial FY:14 guidance is for revenue growth of up 8-14 percent, comps of up 6 percent to up 12 percent, and EPS of $3.40-$3.70, implying growth of 13-23 percent. We had expected a high-single-digit comps guidance range and EPS guidance of $3.37-$3.67, representing growth of 10-20 percent. We believe bullish guidance signals GameStop’s (NYSE:GME) belief in its long-term prospects, including its new business lines, such as digital, mobile, and CE. We expect GameStop to exceed its guidance by YE, as we expect software sales growth in excess of the growth implied by company guidance.

We expect GameStop to be the dominant next-gen retailer. GameStop has sold over three times more PS4s and Xbox Ones during this launch window than it did PS3s and Xbox 360s during the previous launch window. The company’s life-to-date attach rate on PS4 and Xbox One software is 3.3, over 60 percent above the industry. Year-to-date share for PS4 and Xbox One software is 47 percent.

First-quarter 2014 comps guidance was below expectations. Management guided to comps of up 5 percent to up 8 percent, below our estimate of up 15 percent, but guided for EPS well above our and consensus expectations. We believe investors expected double-digit comps guidance due to the two new next-gen consoles, and the first must-have games for each, Sony’s Infamous: Second Son and EA’s Titanfall. We believe investors have become tired of waiting for the software sales turnaround to begin, and first-quarter guidance essentially asked them to wait longer.

Maintaining our OUTPERFORM rating and 12-month price target of $60. Our PT is based on 15x our FY:14 EPS estimate of $4.02. Although many quality retailers trade at 20x EPS, GME faces headwinds from digital and the impact of the next-gen console transition on current-gen sales.

Michael Pachter is an analyst at Wedbush Securities.

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