Share Repurchase Is Helping GameStop

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

Before market open on Thursday, May 23, GameStop (NYSE:GME) will report its fiscal Q1:13 (ending April) results, and host a conference call at 8:00am PT (webcast:

We expect GameStop to report Q1 EPS at the low end of its guidance range. Lowering our Q1 estimates for revenue to $1.81 billion from $1.87 billion, for comps to down 9.0 percent from down 6.0 percent, and for EPS to $0.39 from $0.41 to reflect weakerthan-expected industry sales. Guidance is for revenue of $1.83 – 1.88 billion (implied), comps of down 8.0 – 5.5 percent, and EPS of $0.38 – 0.43, vs. consensus for revenue of $1.84 billion and EPS of $0.40.

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According to NPD in Q1, console/HH SW sales were down 14 percent vs. our 10 percent prior estimate, while HW sales were down 36 percent, vs. our 11 percent prior estimate, with Nintendo’s Wii U continuing to disappoint. GameStop likely outperformed the industry due to a number of high-profile core releases and PowerUp Rewards, resulting in share gains. High-margin used, digital and mobile, cost control, and share repurchases ($400 million left on its existing authorization at Q4) likely allowed GameStop to hit the low end of EPS guidance. We note that GameStop provided Q1 guidance on March 28, two months into Q1, and after most of the quarter’s high-profile releases had launched.

We do not expect significant changes to FY:13 guidance. Current guidance is for revenue of $8.18 – 8.89 billion (implied), comps of down 6.0 percent to up 1.5 percent, and EPS of $2.75 – 3.15. A strong game lineup (including Battlefield 4 and Grand Theft Auto V), new consoles (both expected for the holidays), and repurchases should drive EPS growth. We expect $150 million of mobile growth in FY:13 ($184 million in FY:12) at high margins (28 – 30 percent).

We are adjusting FY:13 and FY:14 estimates, reflecting greater visibility into the next generation. Our FY:13 estimates for revenue go to $8.79 billion from $8.71 billion, and for EPS to $3.28 from $3.30. For FY:14, our revenue estimate goes to $9.16 billion from $9.02 billion, and our EPS estimate goes to $3.89 from $3.70. Without share repurchases, our EPS estimates would be $3.16 and $3.39.

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Maintaining our OUTPERFORM rating, but raising our 12-month price target to $49 from $33. Our revised price target is based on 11x our FY:14 EPS estimate of $3.89 plus $6/share of cash, 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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