Analyst: GameStop Reaps Rewards of New Console Successes


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

Q1 roughly in line with expectations. Revenue was $2 billion versus our estimate of $2.05 billion, consensus of $2.03 billion, and implied guidance of roughly $2 billion to $2.05 billion (up 7 to 10 percent). New hardware sales were up 81.1 percent due primarily to the next-gen consoles, while new software sales were down 20.4 percent due to fewer AAA title launches this year. Same-store sales were up 5.8 percent versus our estimate of up 8 percent and guidance of up 5 to 8 percent. EPS was 59 cents versus our estimate of 61 cents, consensus of 57 cents, and guidance of 55 cents to 60 cents. Gross profit exceeded expectations but was offset by higher-than-expected opex.

GameStop (NYSE:GME) has been a large beneficiary of the success of the new consoles. Through the first six months of launch, industry PS4 and Xbox One hardware unit sales are 107 percent higher than for the previous generation, new console software unit sales are up 45 percent, and sales of accessories are flat. GameStop has outperformed the industry, with next-gen console new hardware unit sales up 182 percent, new software up 113 percent, and accessories up 48 percent. For hardware, GameStop is driving nearly 40 percent of the industry’s total dollar growth this cycle. For software and accessories, it is driving 83 percent and 87 percent of the growth, meaning that it is capturing a larger percentage of the growth for two categories that are more profitable.

Strong mobile growth driven by Technology Brands. Mobile sales were $102.2 million (versus last year’s $51 million), with Technology Brands accounting for $60.2 million of sales and contributing $6 million of operating profit at a 10 percent margin.

Gross margins exceeded our expectations, driven by the preowned and used category and Technology Brands. Q1’s 31.4 percent gross margin was a record high for any first quarter in the company’s history.

Q2 guidance bracketed consensus. Initial Q2:14 guidance is for comps of up 12 to 19 percent and EPS of 12 cents to 20 cents, compared with our prior estimates of up 21 percent and 29 cents, and the prior consensus estimates of up 14 percent and 17 cents.

We expect GameStop to gain a disproportionate share of new game sales for a slew of compelling core releases in FY:14.

Maintaining our OUTPERFORM rating and 12-month price target of $60 for GameStop shares. Our PT is based on 15.5x our FY:14 EPS estimate of $3.87. Although many quality retailers trade at 20x EPS, we believe GameStop faces headwinds from digital and the impact of the console transition on current-gen.

Michael Pachter is an analyst at Wedbush Securities.

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