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STOCKS SLIP WITH MIDEAST TENSIONS, EARNINGS IN PLAY

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Why Best Buy Beat GameStop This Earnings Season

Zacks Equity Research
Updated

Two of the major retail consumer electronics retailers Best Buy Co., Inc. BBY and GameStop Corp. GME announced their second-quarter results this week. However, despite operating in similar market conditions, there was a stark difference in their performances.

Shares of Best Buy have skyrocketed nearly 21% since the announcement of the results, while those of GameStop declined almost 8% during the after-hour trading session on Aug 25. Keep reading to find out why investors were impressed with Best Buy and not with GameStop.

On the Earnings Front

Best Buy has consistently posted better-than-expected results over the last 15 quarters. In the trailing four quarters, the company’s earnings outperformed the Zacks Consensus Estimate by an average of 22%. The company reported second-quarter fiscal 2017 earnings per share of 57 cents that beat the Zacks Consensus Estimate of 42 cents.

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The company’s earnings also increased 16.3% year over year. The company reported a 23.7% surge in online comparable sales driven by improved traffic and conversion rates. The company is making extensive investments to upgrade its operations with special focus on developing omni-channel capabilities and strengthening its partnership with vendors.

BEST BUY Price, Consensus and EPS Surprise

BEST BUY Price, Consensus and EPS Surprise | BEST BUY Quote

On the other hand, though GameStop surpassed the Zacks Consensus Estimate in the trailing four quarters, the year-over-year decline in earnings was a major concern. Notably, the company’s earnings have declined year over year in the trailing two quarters.

The company reported second-quarter of fiscal 2016 adjusted earnings per share of 27 cents, beating the Zacks Consensus Estimate by a penny but declining 12.9% year over year. The company’s second-quarter results were negatively impacted by a sharp decline in comparable store sales, which were primarily affected by a fall in video games and hardware sales.

GAMESTOP CORP Price, Consensus and EPS Surprise

GAMESTOP CORP Price, Consensus and EPS Surprise | GAMESTOP CORP Quote

Revenues

Best Buy reported revenues of $8,533 million that surpassed the Zacks Consensus Estimate of $8,401 million and inched up 0.1% year over year. In the trailing two quarters, the company’s revenues have surpassed expectations. Comparable-store sales (comps) were up 0.8% compared with a rise of 3.8% in the prior-year period. In the third-quarter of fiscal 2016, comparable sales are expected to increase nearly 1%.

On the other hand, GameStop’s revenues declined 7.4% year over year to $1,631.8 million and also fell short of Zacks Consensus Estimate of $1,722 million. Consolidated comparable-store sales (comps) dropped 10.6%, reflecting comps decline of 12.5% at domestic locations and 5.9% at international locations. GameStop revenues have missed estimates in three out of the trailing four quarters.

GameStop’s basic concern is the weakness prevailing in new software sales, which raises apprehensions about the impact of digital downloads on the same. In the reported quarter, new video game hardware sales plunged 33.4% to $216.4 million, whereas new video game software sales fell 18.2% to $382.2 million. For fiscal 2016, comps are expected to decline in the range of 1.5% to 4.5% compared with the previous estimate of flat to down 3%.

Final Verdict

Owing to the shift in consumer buying behavior, retailers find the store-in-a-store concept more viable and profitable to reach their target group. We believe that the strategy seems compelling to most retailers and is often considered a game changer as it facilitates the display of different brands under one roof and ensures higher footfall.

Best Buy is leaving no stone unturned to attract consumers and attain incremental revenues, as is evident from its strategic action of opening over 1,400 "Samsung Experience Shops" within its stores. Taking the initiative a step further, Best Buy also rolled out LG stores across 376 of its outlets in the reported quarter. The company has 660 Samsung and 388 Sony stores.

GameStop operates in a highly competitive video game industry where shoppers now have many alternatives to choose from when it comes to software, hardware, and game accessories for their video game consoles and personal computers. Retail bigwigs such as Wal-Mart, Target, Best Buy, and Game Group, who have also entered the video game market, can dent GameStop’s sales and margins going forward.

Both the stocks currently have a Zacks Rank #3 (Hold).

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BEST BUY (BBY): Free Stock Analysis Report
 
GAMESTOP CORP (GME): Free Stock Analysis Report
 
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Zacks Investment Research