“We expect shares to trade at a compressed EPS multiple until GameStop Corp. GME slows the decline in its core video game business,” Wedbush’s Michael Pachter said in a note, while maintaining an Outperform rating on the company and lowering the price target from $28 to $25.
Disappointing Q4
The analyst mentioned that although GameStop witnessed a challenging year-end for physical video game products, the company was able to deliver its Q4 EPS at the high end of the guidance.
Comps declined 16.3 percent during Q4, at the lower end of the guidance range, while the adjusted EPS came in at $2.38, ahead of the consensus and at the high end of the guidance.
The company also reported charges of $56.5 million for the quarter, mostly related to Tech Brands.
“According to management, excluding Pokémon, domestic physical industry sales of the top eight titles declined by over 40 percent y-o-y in the period from October to December. Also, there was widespread discounting, with GameStop unwilling to match pricing in some instances,” Pachter stated.
2017 Guidance
However, GameStop’s initial fiscal-year 2017 guidance is below expectations, with revenue guidance of $8.44 billion–$8.78 billion, comp decline of 5 percent to flat, and adjusted EPS of $3.10–$3.40.
“A higher tax rate after a large tax benefit in Q4:16 accounted for $0.25 of the drop-off from $3.77 in FY:16, with increased interest expense and a 3 – 10 percent drop in operating profit making up the remainder,” the analyst noted.
The company reiterated the key long-term targets its Collectibles and Tech Brands businesses, with Collectibles revenue of $1 billion by 2019 and Tech Brands’ operating profit at $200 million.
“We remain unconvinced that the huge outlays for the Tech Brands businesses were a wise investment given a spotty execution track record and debt of $815 million,” Pachter went on to say.
In Friday's pre-market session, shares of GameStop were seen down 10.68 percent at $21.40.
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