GameStop Q1 Sales Strength Mixed With Segment Weakness

Reviewing GameStop Corp. GME first-quarter results, Credit Suisse noted sales strength, although the results showed segment weakness.

Mixed Results

Analysts Seth Sigman, Kieran McGrath and Alexander Thompson indicated that the first-quarter results were mixed, with comps and earnings per share above the consensus estimates and relatively in line with actual market expectations.

Meanwhile, the analysts noted that sales were better than expected, with comps up 2.3 percent comparing to their estimate for a 1 percent drop and the Street estimate for a 4.8 percent decline.

The analysts attributed the 19-percent drop in gross profit comps to a slowdown in the wireless upgrade cycle and changes in AT&T Inc. T underlying compensation plan. The changed plan, according the analysts, shifts the focus from mobile upgrades to ancillary entertainment products.

Positives/Negatives

Credit Suisse sees the weaker software (down 8.2 percent), driven by a tougher comparison, weak mobile trends and continued declines in pre-owned as negatives.

"We expect software compares to continue to be difficult into 2Q as the industry laps key games released in May, with additional headwinds in 2H from the delay of 'Red Dead 2' into 2018. Based on our estimates, that could have cost GME total sales ~1.5 percent," the firm said.

On the other hand, the analysts termed the upside to hardware, a lower tax rate and strong collectibles growth as positives.

"Net/net, it's good to see signs of life with the Switch-related improvement but this story is back half weighted, and better visibility is needed for software and mobile," the firm said.

Outlook

The firm noted that the company's guidance implied an improvement in the second half, including increased sales proficiency in entertainment products and improvements from the expected Apple Inc. AAPL iPhone 8 launch. Citing the first quarter EBIT decline, the firm said it sees some risk to the $120 million EBIT target.

As such, the firm has a Neutral rating and a $20 price target on the shares of the company.

At time of publication, shares of GameStop were down 7.54 percent at $21.84.