Why Is GameStop (GME) Down 4.9% Since Its Last Earnings Report?

A month has gone by since the last earnings report for GameStop Corp. GME. Shares have lost about 4.9% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is GME due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

GameStop reported fourth-quarter fiscal 2017 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. The company’s results were driven by Nintendo Switch’s stellar performance in the quarter.

In the quarter under review, adjusted earnings came in at $2.02 per share surpassing the Zacks Consensus Estimate of $1.96 but decreased 15.1% from the year-ago period. Also, net sales were up 15% year over year to $3,502.5 million, which outpaced the consensus estimate of $3,253 million.

The company’s sales were driven by robust demand for Nintendo Switch, and collectibles and software. International sales were also strong during the quarter. Further, GameStop witnessed sharp increase in worldwide omni-channel sales.

Let’s Delve Deeper

Consolidated comparable store sales (comps) increased 12.2%, reflecting a gain of 8.3% at international locations and 14.2% at domestic locations.

By sales mix, new video game hardware sales jumped 44.8% to $844 million while new video game software sales were up 12.4% to $1,042.3 million. However, pre-owned and value video game products sales came in at $663.1 million, down 2.6% year over year. Increase in new hardware sales were driven by solid demand for Nintendo Switch while new software sales increased on account of robust title lineup.

Video game accessories sales jumped 37.4% to $327.7 million. While non-GAAP digital receipts increased 10.6% to $413 million, GAAP digital sales rose 7.3% to $61.4 million.

Technology Brands sales were down 14.2% to $219.7 million due to alteration in AT&T’s dealer compensation structure. Additionally, the company stated that performance of Technology Brands was not up to the mark in fiscal 2017 and fell short of its estimates primarily on delay in release of the iPhone 8 and iPhone X as well as due to change in compensation structure by AT&T. The company said similar situation will persist in the first half of fiscal 2018.

Nevertheless, Collectibles sales surged 22.8% to $260.8 million buoyed by growth of licensed merchandise offerings and promotions during holiday season.

GameStop intends to enhance collectibles business to $1 billion by the end of fiscal 2019. Earlier, management had stated that it remains optimistic about non-physical gaming businesses and expects this category to reach approximately 50% of operating earnings by the end of fiscal 2019.

While gross profit inched up 1.6% to $ 1,024.5 million, gross margin contracted 380 basis points (bps) to 29.3%. Adjusted operating income declined 9.7% to $309.8 million while adjusted operating margin shriveled 250 bps to 8.8%.

Store Update

In fiscal 2017, GameStop shuttered a net of 131 video game stores globally, ending the year with 3,827 video game stores in the United States and 1,969 internationally. The company closed 80 net technology brands store and sold 65 Cricket stores. At the end of 2017, the company has 1,329 AT&T stores and 48 Simply Mac stores. Also, it opened 17 collectible stores and now has 103 stores.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $864.4 million, net receivables of $182.7 million, long-term debt of $817.9 million and shareholders’ equity of $2,214.5 million.

For fiscal 2018, management projects capital expenditures in the range of $110-$120 million and free cash flow to be approximately $300 million.

Guidance

GameStop expects fiscal 2018 total sales to be down 6% to 2% and projects comps to be flat to down 5%. For the year, management envisions earnings in the range of $3–$3.35 per share.

In fiscal 2018, the company anticipates collectibles business to register growth but expects video game business to decrease by mid-single digits.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.

GameStop Corp. Price and Consensus

 

GameStop Corp. Price and Consensus | GameStop Corp. Quote

VGM Scores

At this time, GME has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for value investors while also being suitable for those looking for growth and to a lesser degree momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise GME has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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