GameStop Earnings Rises - Analyst Blog

GameStop Corporation (GME), the video game and entertainment software retailer, recently posted third-quarter 2010 results. The quarterly earnings of 38 cents a share came a penny ahead of the Zacks Consensus Estimate and rose 18.8% from 32 cents earned in the prior-year quarter driven by top-line growth and effective cost management.

The Zacks Consensus Estimate was stable prior to the earnings announcement with no upward or downward revisions in the analysts' estimates in the past 30 days.

Behind the Headline

The Grapevine, Texas based company, GameStop, posted total revenue of $1,899.2 million that fell short of the Zacks Consensus Revenue Estimate of $1,948 million but climbed 3.5% from the year-ago quarter. The retailer hinted that comparable-store sales advanced 1.1%. U.S. segment comparable-store sales grew 5.3%, whereas international comparable-store sales were adversely impacted by sluggish hardware sales.

By sales mix, new video game hardware sales dropped 14.1% to $276 million, whereas sales of new video game software climbed 9.1% to $839.1 million. Sales of used video games registered a growth of 4% to $528 million.

GameStop, which competes with Best Buy Co. Inc. (BBY), intimated that the robust market share was gained from releases, such as Halo: Reach, Madden NFL 2011, Fallout: New Vegas, NBA 2K11 and Medal of Honor.

Despite a 3.1% increase in cost of sales GameStop's gross profit for the quarter jumped 4.4% to $546.3 million, whereas gross margin expanded 30 basis points to 28.8% aided by top-line growth. Operating income rose 2.8% to $92.8 million, whereas operating margin remained flat at 4.9%.

Other Details

GameStop ended the quarter with cash and cash equivalents of $181.1 million compared to $292 million in the year-ago quarter. During the quarter, the company bought back 2,611,993 shares at $18.91 each under its present $300 million share repurchase program.

The company also notified that year-to-date it has opened 156 net new stores – 89 in the U.S., 47 in Europe, 12 in Australia/New Zealand and 8 in Canada.

Management Guided

Moving forward, GameStop raised its fiscal 2010 guidance. The company now expects earnings in the range of $2.63 to $2.69 per share, up from $2.58 to $2.68 previously anticipated, and reflects a year-over-year growth of 16% to 19%. The company continues to assume flat-to-2% growth in comparable-store sales.

For the fourth quarter, the company anticipates earnings in the range of $1.53 to $1.59 per share, representing a year-over-year growth of 19% to 23%, and expects a comparable-store sales growth between 2% and 4%.

Following an improved outlook, a positive sentiment may be palpable among the analysts covering the stock, and we could witness a rise in the Zacks Consensus Estimate in the coming days. The current Zacks Consensus Estimates of $1.54 for the fourth quarter and $2.63 for fiscal 2010 lie at the low end of the company's current guidance range.

Currently, we have a Neutral rating on GameStop. The Zacks #3 Rank, which translates into a short-term Hold recommendation, also correlates with our long-term view.

 
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