GameStop Balances Risk-Reward - Analyst Blog

GameStop Corporation (GME) is well positioned to take advantage of the growing market for video game products and PC entertainment software.The company's strategy is to grow through store expansions in favorable localities, by providing the largest title collection of video games, and by leveraging its first-to-market distribution network to offer the latest hardware and software releases.

The company holds a significant position in the used video game products market. GameStop provides a greater selection of used video game products for both current and previous generation platforms. The market for used video game products has been resilient to the recent economic downturn.

GameStop has been also actively managing its capital. The company intends to generate adequate cash flow from operations in the next four to five years, to fund opening of new stores, improvements to existing stores, refurbishment upgrades, buyout plans as well as share repurchase program.

Moving forward, GameStop 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%.

The video game industry is highly competitive and video game shoppers now have many alternatives to buy software, hardware and game accessories for video game systems and personal computers. Retail heavyweights such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT) and Best Buy Company Inc. (BBY) have also entered the video game market. These larger retailers could dent GameStop's sales and margins.

Moreover, the company's customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels. This may prompt consumers to curtail their entertainment expenditures, which in turn, could result in lower store traffic and reduced profitability for the company.

Currently, consumers can only download a limited number of PC entertainment software and older generation video games from the Internet. However, with the advancement of technology, if the consumers' accessibility increases, they may no longer prefer to buy PC entertainment software and video games through the company's retail stores.

Given the pros and cons, we prefer to be Neutral on the stock. GameStop also holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.

 
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