The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
GameStop (NYSE:GME) Q1 beat despite industry weakness ahead of next gen launches. Revenue was $1.87 billion, vs. our estimate of $1.81 billion, consensus of $1.84 billion, and implied guidance of $1.83 – 1.88 billion. Comps were down 6.7 percent, vs. our estimate of down 9.0 percent, and guidance of down 8.0 – 5.5 percent. EPS was $0.46, vs. our estimate of $0.39, consensus of $0.40, and guidance of $0.38 – 0.43. The EPS beat was driven primarily by a 1 percent gross margin increase from mix shift to digital and mobile.
Market share gains continue. New SW sales were down only 4 percent, vs. the industry decline of 14 percent. This industry outperformance led to a 470 basis point market share increase in Q1. GameStop had 47.4 percent domestic market share on Xbox 360/PS3 new software. New HW sales were down 31 percent, vs. the industry decline of 36 percent.
FY:13 guidance increased at the low-end to reflect Q1 results and Xbox One. GameStop narrowed FY:13 guidance for comps to down 5.0 percent to up 1.5 percent from down 6.0 percent to up 1.5 percent, and for EPS to $2.90 – 3.15 from $2.75 – 3.15.
Adjusting our FY:13 estimates. We are increasing our FY:13 estimates for revenue to $8.85 billion from $8.79 billion and for comps to up 1.5 percent from up 1.0 percent to reflect better-than-expected top-line growth in Q1, but are maintaining our EPS estimate of $3.28 to reflect lower-than-expected Q2 guidance.
Well-positioned for the upcoming console launches. GameStop once again disclosed that the PowerUp community has an installed base of 24 million consoles. We estimate that this represents $1.8 billion of currency available for trades for the new consoles assuming a $75 per console trade credit.
We do not expect either next gen console to block used gaming. We believe the HW manufacturers would be foolish to block used gaming on the next gen consoles because it would negatively impact trade-in credits used for purchases of next gen consoles and games. GameStop management disclosed it generates over $1 billion in trade-in credits every year, with 70 percent used for new games. Credits fund 17 percent of the total spending on new games and digital content at GameStop.
Maintaining our OUTPERFORM rating and our 12-month price target of $49. Our price target is based on 11x our FY:14 EPS estimate of $3.89 plus $6/share of cash at year-end, and reflects strong revenue and EPS growth from market share gains, digital growth, and the share repurchase program.
Michael Pachter is an analyst at Wedbush Securities.
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