We have maintained our long-term Neutral recommendation on
) with a target price of $55.00.
Why the Reiteration?
GameStop did surprise us with its encouraging second-quarter
fiscal 2013 results, especially given the slump that persists in
the gaming industry. Gaming companies are witnessing a continued
decline in video game retail sales.
Amid challenges, strong performance of the company's digital
and mobile businesses, effective cost management, gross margin
improvement and a gain in market share facilitated GameStop to
post earnings of 9 cents a share that comfortably surpassed the
Zacks Consensus Estimate of 4 cents.
Expecting favorable trends in new console pre-orders and
better-than-expected launch quantity allocation, management came
up with an encouraging earnings outlook for fiscal 2013.
GameStop now envisions earnings in the range of $3.00 and
$3.20 per share, up from its earlier guidance range of $2.90 to
$3.15. Comparable-stores sales are expected to be in the range of
-3.5% to +1.5%. For the upcoming quarter, GameStop forecasts
comparable-store sales to increase between 11% and 15%, while
earnings are expected in the range of 50 cents to 55 cents a
On the whole, GameStop's second-quarter results were
encouraging. However, a year-over-year drop of 10.7% in the top
line and a 43.8% decline in the bottom line did disappoint us.
Moreover, we expect video game retail sales to remain sluggish in
the coming quarters and expect customers to postpone their
purchasing activities till the release of new hardware consoles
from Microsoft and Sony.
Further, the video game industry is highly competitive, and
video game shoppers now have several alternatives to buy
software, hardware, and game accessories for video game systems
and personal computers. Alongside, competition from retail
heavyweights such as
Wal-Mart Stores Inc
Best Buy Co., Inc
) could dent GameStop's sales and margins.
That being said, we remain optimistic on the company's digital
and mobile business. We believe that mobile has strong growth
potential due to the improving gaming quality, which is the major
factor behind higher user spending.
Currently, GameStop holds a Zacks Rank #2 (Buy).
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