GameStop Changes Q4 Guidance Based On Holiday Period Performance

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In 2014, video game retailer GameStop (NYSE:GME) struggled in terms of new video game software sales, as the whole industry witnessed decline in title sales. On the other hand, demand for the current generation of video game consoles: Microsoft’s Xbox One and Sony’s PlayStation 4,  remained strong throughout the year. This maintained the balance in the industry in terms of revenue generation. According to the NPD December report, the industry generated $3.25 billion in the last calendar month, down from $3.28 billion in December 2013. Moreover, in the last calendar month, gamers spent $1.31 billion on hardware, down nearly 4% year-over-year (y-o-y). However, the trend continued in the software segment, as the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. [1] For the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y.

Top video game developers, such as Activision Blizzard (NASDAQ: ATVI) and Electronic Arts’ (NASDAQ:EA) launched their core titles just before the holiday period. EA with its sports titles: FIFA 15 and Madden NFL 15, and Activision with its FPS titles: Destiny and Call of Duty Advanced Warfare, which gave the gamers something to cheer about in the months of November and December. All of these titles were the most awaited titles for the year 2014 in their respective genres. Video game retail companies, especially GameStop, was confident going into the holiday quarter with a lot in store for the core gamers.

However, GameStop’s Q3 results were below expectations, primarily due to the absence of core titles, leading to a 2.3% year-over-year (y-o-y) decline in the company’s comparable store sales and a 0.7% y-o-y decline in the quarter’s net revenues. The company expects the comparable store sales in the fourth quarter to range from -5% to +2% and full year comparable store sales to range from 2% to 5%, primarily due to the shift of several title launches to next year. [2]

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Our price estimate for the company’s stock is $43, which is above the current market price.

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On January 13, 2015, GameStop released its  sales report for the nine-week holiday period ending January 3 and reported total global sales of $2.94 billion, down 6.7% y-o-y. Furthermore, the results were negatively impacted by the foreign currency exchange rates. Moreover, the comparable store sales dropped 3.1% y-o- y, out of which the U.S. witnessed a 3.3% y-o-y decline, whereas the international stores witnessed a 2.7% decline. If we look at this month-wise, November comparable store sales declined a massive 12% y-o-y, primarily because the last year’s November witnessed the launch of new consoles (PS4 and Xbox One).  On the other hand, December’s comparable store sales rose 4.4% y-o-y. [3]

  • Software Sales: Next generation Console Titles Drive Segment Growth

The company reported that the new video game software sales for the holiday quarter grew 5.8% y-o-y, driven by a 94.4% y-o-y increase in PS4 and Xbox One software sales. Titles, such as Call of Duty: Advanced Warfare, Grand Theft Auto V, Far Cry 4, FIFA 15,  and Destiny, led the holiday quarter and resulted in an increase in software sales. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. [4] As of January 3, the title has sold approximately 17.6 million units, leading the holiday quarter in the FPS genre. Moreover, the gamers who have bought the new console systems were eager to buy games to try  out on them, and popular titles in the market just boosted the process.

  • Hardware Sales: Gamers Still Opting For New Console Systems

Sales of new video game hardware declined 32% y-o-y; however, this does not indicate the losing demand of the new consoles. This is clear if we look at the December hardware sales, which were nearly 31% more y-o-y. The figures just indicate that last year November witnessed increased hardware sales due to the high initial sales after the launch of new console systems. Xbox One was the best-selling console systems in the U.S. in the holiday period, overtaking PlayStation 4’s dominance, primarily due to decreased prices of Xbox One. [5] Looking at the total sales figures in absolute terms, the company is confident of its hardware sales in 2015.

  • Pre-owned Product Segment

The company’s Pre-owned category witnessed a 1% y-o-y increase in sales in constant currency, with a 1.3% y-o-y increase in the U.S. GameStop’s game sales through buy-sell-trade model are highly correlated with new game sales, as the latter help replenish the company’s inventory; pre-owned game sales have consistently been around 65% of new software sales for the last four years. Furthermore, the transition of gamers to next-gen consoles might give a further push to  already strong console trades and might result in improved pre-owned inventory. An increase in software and hardware sales in the holiday quarter boosted the performance of the pre-owned product segment.

Based on the recent sales figures, the company reiterated its Q4 EPS guidance range of $2.08 to $2.24 and its 2014 full year guidance range of $3.40 to $3.55. Also, the company now expects its Q4 comparable store sales to range from -2.5% to -1%.

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Notes:
  1. NPD December 2014 report []
  2. GameStop Q3 earnings call transcript []
  3. GameStop reports 2014 holiday sales results []
  4. Call of Duty: Advanced Warfare global sales, VGChartz []
  5. December NPD report []