Analyst: GameStop Has Potential for Expansion Into Prepaid Mobile

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

After the market close on Thursday, GameStop (NYSE:GME) will report fiscal Q1:14 (ending May 3) results and will host a call at 2 p.m. Pacific Time (dial: 888-244-2430, passcode: 8959711; webcast: http://investor.gamestop.com).

We expect Q1 results at or above the high end of guidance. Our estimates are for revenue of $2.05 billion (up 9.8 percent y-o-y), comps of up 8 percent, and EPS of 61 cents, versus guidance for revenue growth of up 7-10 percent (implies roughly $2 billion-$2.05 billion), comps of up 5-8 percent, and EPS of 55-60 cents, and consensus of $2.03 billion and 58 cents. According to Gamesindustry.biz, industry sales were up 8 percent y-o-y, the high end of guidance. SW sales were down 20 percent and HW sales up 60 percent, with next-gen console SW and HW offsetting current-gen declines. GameStop has historically gained share during transitions, suggesting performance in line or above industry results, and guidance for Q1 and FY:14 was reiterated on April 22. Also, we do not see mix as an obstacle to achieving EPS guidance as management was aware of current-gen weakness when guidance was provided.

We expect full-year guidance to remain largely unchanged. Current full-year guidance is for revenue growth of up 8-14 percent (implies roughly $9.76-10.31 billion), comps of up 6-12 percent, and EPS of $3.40-$3.70. Our current estimates are for revenue of $10.31 billion, comps of up 12 percent, and EPS of $4.02, which factors in share repurchases. GameStop had $436.5 million remaining in its repurchase authorization on March 31. We do not expect full pass through of any Q1 beat, as management is likely to remain conservative.

We expect Q2 guidance roughly in line with our estimates. We are modeling revenue of $1.73 billion, comps of up 21 percent (from a manageable comparison of down 10.7 percent in PY), and EPS of 29 cents. Results in the last three quarters of the year should benefit from the new $399 Xbox One without Kinect, expected to launch on June 9. We see synergies between GameStop’s buy-sell-trade model and its entry into technology retail. We see significant potential for its expansion into prepaid mobile, as the new stores provide an outlet for used smartphones. We see less synergy from Spring Mobile, but acknowledge GameStop is positioned to gain from a steady supply of Spring Mobile trade-ins. We see the least synergy from Simply Mac, which we think has far less in common with its core business.

Maintaining our OUTPERFORM rating and 12-month price target of $60 for GameStop shares. Our PT is based on 15x our FY:14 EPS estimate of $4.02.

Michael Pachter is an analyst at Wedbush Securities.

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