GameStop Needs To Reverse The Decline In Core Video Game Business

Wedbush’s Michael Pachter expects GameStop Corp. GME shares to continue to trade at a compressed multiple until the company is able to successfully reverse the decline in its core video game business.

Pachter maintains an Outperform rating on the company, with a price target of $28.

Same-Store Sales Decline

GameStop’s holiday same-store sales declined 18.7 percent, significantly missing the Q4 guidance, driven by weaker than anticipated industry sales, promotional pricing pressure and a drop in in-store traffic due to a digital mix shift.

“GameStop was unwilling to sacrifice margin dollars by matching some of the deep discounting at other retailers,” the analyst stated.

Data from NPD revealed that industry sales declined about 29 percent in November and 18 percent in December, well below the levels expected by management, with the company acknowledging that it had lost market share during both months.

Q4 Guidance Missed

In addition, GameStop saw a 30.3 percent decline in new hardware sales, while new software sales declined 22.8 percent, again below the Q4 guidance.

The company has lowered its comps guidance for Q4 and FY 2016, while “new businesses fared better, helping GameStop to maintain its Q4 and FY:16 EPS guidance ranges of $2.23 – 2.38 and $3.65 – 3.80,” the analyst noted.

The company was able to achieve its Collectibles revenue guidance, while the Tech Brands revenue grew 44 percent, beating the estimate.

2017 Expectations

GameStop intends to lower SG&A spend by $100 million by 2019 by closing its unproductive stores.

However, Pachter expect modest net income declines to continue in 2017, with flat EPS due to a lower share count.

During Q1:17, the company is expected to benefit from the launch of Nintendo Switch, while the Collectibles and Tech Brands segments are likely to continue to grow.

At last check, shares of GameStop were up 3.41 percent at $23.50.