Looks like GameStop is improving its game

The video-game retailer's not-nearly-as-bad-as-expected results and more upbeat outlook have investors interested again.

By Jonathan Berr Aug 23, 2013 7:28PM
GameStop (GME) shares surged to $51.91 this week -- their highest level in more than four years -- after the No. 1 video-game retailer reported earnings that far exceeded even the most optimistic of predictions. The Grapevine, Texas, company also gave bullish earnings guidance for both the current quarter and fiscal year.

As expected, net income dropped 50% to $10.5 million, or 9 cents per share, from $21 million, or 15 cents per share, a year earlier as consumers awaited the release of new consoles from Sony (SNE) and Microsoft (MSFT), which publishes Killer Companies. GameStop’s sales fell 10.7% to $1.55 billion. Same-store sales plunged 10.7%, which actually was better than GameStop had expected. This key metric for retailers tracks sales at stores open for at least one year.
Though the earnings were ugly, investors had expected much worse: profit of just 4 cents per share on revenue of $1.35 billion.

There are many reasons for GameStop's relative success. Expanding into related businesses -- such as providing digital codes to download games, selling Android tablets and refurbishing Apple mobile devices -- cushioned the company against declines in the gaming industry.

Mobile sales skyrocketed 121.4% to $55.1 million during the most recent quarter. And digital receipts jumped 17.9% to $158 million. But new hardware sales plunged 19.4%, while used equipment sales slipped 6%. The strength in what GameStop calls its emerging businesses enabled gross margins to improve by 130 basis points.

File photo of the GameStop store in New York on April 28, 2008 just before 'Grand Theft Auto IV' was released (© Ramin Talaie/Bloomberg via Getty Images)GameStop is expecting big things from the November launch of Sony's PlayStation 4 and Microsoft's Xbox One. New titles such as Take-Two Interactive's (TTWO) "Grand Theft Auto V" should also boost sales, which have been depressed for a while by the exploding popularity of mobile games.

During its current quarter, GameStop forecast earnings of 50 and 55 cents per share, well ahead of the 35 cents analysts expected. Wall Street was particularly heartened to learn that GameStop sees same-store sales increasing between 11% and 15%.

The fiscal year looks good, too. Profit will be $3 to $3.20, ahead of the $2.90-$3.15 forecast GameStop issued in May. Same-store sales will range from a 3.5% drop to a 1.5% gain, also better than its previous forecast of a drop of 5% to growth of 1.5%.

Wall Street analysts cheered the results, and some even thought GameStop's guidance was overly conservative. Piper Jaffray's Michael Olson, for one, reiterated his overweight rating on the stock and gave it a $59 price target, more than 13% over where it recently traded. The stock's price-to-earnings multiple is about 18, which appears to be reasonable.

Investors don't need to wait to hit the reset button. The time to buy the stock is now.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
3Comments
Aug 27, 2013 1:27PM
Aug 27, 2013 8:39AM
avatar
As a former employee of GameStop I would never recommend purchasing GameStop shares -ever-. It is a company that is destined to die out within the next decade. The GameStop corporation is attending to wrangle in as much profit as it can before this due date passes--stores are no longer video game exclusive as GameStop begins to sell more consumer electronics, services, and non-game related merchandise (see iPhones, cellular plans, etc).

GameStop is going to follow the route of the music store when iTunes took root. Media-based video gaming is quickly on its way out and soon and ALL gaming will be done digitally. 
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