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GameStop (GME) Q2 Earnings Likely to Fall Y/Y: Here's Why

GameStop CorporationGME is expected to report second-quarter fiscal 2018 results on Aug 23. The company outperformed the Zacks Consensus Estimate in three of the trailing four quarters by an average of 7.7%. In the last reported quarter, this videogame retailer delivered a positive earnings surprise of 8.6%. Let's see how things are shaping up prior to this announcement.

Which Way Are Top & Bottom-Line Estimates Headed?

The Zacks Consensus Estimate for the quarter under review stands at 7 cents, reflecting a year-over-year decline of more than 50%. We note that the Zacks Consensus Estimate has declined by a penny in the last 30 days.

The Zacks Consensus Estimate for revenues of $1,602 million indicates a decline of roughly 5.1% from the year-ago quarter. We note that total revenues of this Texas-based company decreased 5.5% in the last reported quarter.

Well, the obvious question that comes to mind is whether GameStop will be able to sustain its positive earnings surprise streak in the second quarter of fiscal 2018. Though the past trend indicates a positive surprise, it will not be wise to jump to conclusion without analyzing the factors at play.

GameStop Corp. Price and EPS Surprise

GameStop Corp. Price and EPS Surprise | GameStop Corp. Quote

Factors Influencing Q2

GameStop, which has been holding exploratory talks relating to a potential transaction, has been grappling with falling sales in core business, affected by intense competition and leadership issues. Meanwhile, gradual shift to digital and mobile downloads is posing a threat to its software business.

We note that the company's Technology Brand has been witnessing soft sales since the past few quarters. In the first quarter of fiscal 2018, sales in this segment declined 16.1% following a decrease of 14.2% and 10.2% in the fourth and third quarter of fiscal 2017, respectively. This may be attributable to change in dealer compensation structure of AT&T, late release of Apple iPhoneX and less promotional activity by AT&T.

Further, GameStop witnessed soft sales and comps in the first quarter. The company continues to expect fiscal 2018 sales to decline in a band of 2-6% and projects comparable store sales to be flat to down 5%.

Gross margin, a key financial metric determining a company's basic financial health, has consistently declined in the past few quarters. In the first quarter, gross margin contracted 30 basis points (bps) to 34%, following a decline of 380 bps to 29.3%, and 140 bps to 34.7% in the fiscal fourth and third quarter of 2017, respectively. Contraction in gross margin in the reported quarter was primarily due to a decline in net sales.

Additionally, GameStop's net earnings per share have been declining year over year in the last couple of quarters. The company's first-quarter fiscal 2018 earnings declined 39.7% on a year-over-year basis, after a 15.1% fall in the fourth quarter of fiscal 2017. Moreover, the company continues to expect fiscal 2018 adjusted earnings per share in the range of $3.00-$3.35, which does not look encouraging when compared to earnings of $3.34 in fiscal 2017.

Nevertheless, the company's collectibles sales category has been profitable for quite some time now. During the first quarter, collectibles business sales rose 24.4% following an increase of 22.8% and 26.5% in the fiscal fourth and third quarter, respectively. Collectibles business was driven by growth of licensed merchandise and innovative product offerings. Further, management expects this segment to become a $1-billion business by the end of fiscal 2019. Also, the company's venture into digital, iDevice and gaming tablet businesses would be accretive to its results.

What Does the Zacks Model Say?

Our proven model does not conclusively show that GameStop is likely to beat estimates this quarter. A stock needs to have both - a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP - for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

GameStop has a Zacks Rank #4 (Sell) and an Earnings ESP of -45.95%. You can see the complete list of today's Zacks #1 Rank stocks here .

Stocks With Favorable Combination

Here are companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Foot Locker FL has an Earnings ESP of +3.55% and a Zacks Rank #2.

Big Lots BIG has an Earnings ESP of +4.48% and a Zacks Rank of 2.

Best Buy Co. BBY has an Earnings ESP of +1.46% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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