Wal-Mart to Offer Used Games, GameStop’s Outlook Cloudy
Before the market open on Thursday, March 27, GameStop (NYSE:GME) will report fiscal Q4:13 (ending February 1) results, and will host a call at 8 a.m. PT (dial: 888-211-9951888-211-9951, passcode: 7583159, webcast: http://invest r.gamestop.com).
We expect Q4 results at or above the high end of guidance. We expect revenue of $3.85 billion, comps of up 10.2 percent, and EPS of $1.97 versus consensus of $3.79 billion and $1.93 guidance for comps of up 2 – 9 percent and EPS of $1.85 – 1.95. Management updated guidance on January 14 and has generally adopted aconservative approach to guidance. Given strong next-gen demand and a large amount remaining under the company’s share repurchase authorization, we are confident GameStop can deliver results at or above the high-end of guidance.
We expect conservative FY:14 guidance. We expect management to guide to EPS growth of 10 – 20 percent year-over-year, implying a range of $3.37 – 3.67. We expect apositive high-single-digit comps guidance range, reflecting solid sales of the two next-generation consoles, and expect actual FY:14 results to exceed initial guidance. For FY:07, the second full year of the current-gen cycle, GameStop initially guided to EPS of $1.37 – 1.40 and comps of up 14 – 16 percent, and delivered full-year EPS of $1.75 and comps of up 24.7 percent.
We expect GameStop to remain dominant in used gaming, despite Wal-Mart’s (NYSE:WMT) new efforts in the sector. Last week, the Wall Street Journal reported that Wal-Mart will introduce a program that allows customers to trade in used games for gift cards that can be used on any item in-store and online. In addition, Wal-Mart will offer used games at discounted prices beginning this summer. We do not expect Wal-Mart to gain meaningful share from GameStop, as we believe it will have difficulty attracting supply from its core customer base. GameStop attracts used inventory from its PowerUp Rewards members, who have an incentive to trade in games as currency to help pay for more games. The company also benefits from expertise in dealing with local regulation and has a proprietary system for used inventory and pricing.
We are 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.