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Q3 Preview: Traders Sell GameStop (GME) Following Release of CoD and Ahead of Earnings

Posted: 11/16/2011 4:05:00 PM
Referenced Stocks: ATVI;GME

Shares of GameStop ( GME ) are trading down about 4 percent to $22.62 Wednesday ahead of the company's third-quarter earnings report Thursday before the opening bell.

The third quarter conference call is scheduled for the same day at 8:00 am PT (11am ET); Dial-In: 877-857-6151, Passcode 6934046.

The Wall Street consensus suggests GameStop will report earnings around $0.39 per share on $1.96 billion in sales. For the third quarter of 2010, the company reported earnings of $0.38 per share on $1.9 billion in total sales.

Notably, since the release of Activision Blizzard's (Nasdaq: ATVI) Call of Duty: Modern Warfare 3 , shares of GameStop are down nearly 12 percent.

11 analysts rate shares of GameStop as a Buy, six rate the stock a Hold, and one recommends selling the stock. The average price target on shares of GME is $30 with a range from $24 to $34.

Following the release of October NPD software data, Goldman Sachs believes GameStop has increased its market share by 100 basis points. The firm sees sales falling 5 percent over the quarter to $1.917 billion. Earnings will be around $0.38 per share, according to Goldman. Gross margin should be 29.6 percent and operating margin is predicted to be 4.7 percent.

Looking ahead, the firm sees the Hardware segment outperforming the industry during the fourth-quarter. Goldman is modeling for quarterly sales to be down 13 percent from the year-ago quarter to $3.66 billion. Sees EPS of $1.77.

The firm sees Goldman believes management will cut its full year same-store sales guidance and reaffirm its earnings range of $2.82-2.92.

Goldman reaffirmed its Neutral rating and $24 price target on GameStop.

Wedbush is bullish going into the quarter, forecasting earnings of $0.41 on $1.919 billion in sales. The firm believes PowerUp Rewards will drive margin expansion for the quarter, but has cut is comp growth expectations from 4 percent to flat.

An analyst at Wedbush said, "Our estimates reflect over-indexing on HD console units, digital growth, and gains from PowerUp Rewards, offset by lower hardware dollars and difficult used comps. Overall, we estimate GameStop comped down 4 percent in new software, up 16.3 percent in used, and down 8 percent in hardware. The company should see contribution from 3DS and Kinect, both unavailable in Q3 last year."

For the full year, the firm believes GameStop will cut its revenue comp guidance, but reiterated its earnings estimate due to cost cuts and the buying back of shares. Wedbush believes the fourth quarter should be a substantially better quarter due to the intense lineup of games coming out. The firm is maintaining its Outperform rating and $33 price target on the shares.