GameStop’s Earnings Preview: Poor Holiday Period Might Drive Down Revenue Growth

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The video game retailer, GameStop (NYSE:GME) is scheduled to release its fourth quarter and full year fiscal report for the year 2014 on March 26, 2015. [1] The company is fairly confident of the new video game hardware sales, owing to the strong demand of the eight generation consoles, Microsoft’s (NASDAQ:MSFT) Xbox One, and Sony’s PlayStation 4, in 2014. On the other hand, the whole industry witnessed a decline in software title sales in 2014, due to less numbers of AAA title releases. However, this trend was somewhat expected, considering it was the first full year after the release of the new generation consoles, and the gamers are more attracted towards buying the new console systems. Moreover, those people with older console systems prefer to buy the new console systems before trying out the new games. Nonetheless, this trend was expected to gradually reverse and it was visible in the January and February NPD reports. In the first two months of 2015, the software sales outperformed last year’s figures, with 5.5% and 6.5% year-over-year (y-o-y) increases in software sales in January and February, respectively. On the other hand, the hardware sales (mostly console sales) declined 23% y-o-y in January 2015, and rose just 9% y-o-y in the month of February. [2] [3]

Our price estimate for the company’s stock is $39, which is slightly below the current market price.

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Lower Sales In Holiday Period To Hamper Full Year Results

GameStop reported poor numbers in its third fiscal quarter report, as the company reported a 0.7% y-o-y decline in net revenues and 2.3% y-o-y decline in comparable store sales. [4] As a result, the company’s net earnings declined 6.3% y-o-y. The positive impact of strong new hardware sales was offset by a delay in the release of Assassin’s Creed postponed from the third quarter into the fourth quarter.

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. 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. [5] We have discussed the details of the report in our prior article. (See: GameStop changes Q4 guidance based on holiday period performance)

Sales of new video game hardware declined 32% y-o-y, due to release of new generation console systems in 2013. Although, this was expected, the increase in software sales in the holiday period was less than the anticipation. 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.

Pre-owned Product Segment and Digital Revenues To Provide Stability

GameStop’s Pre-owned and value product segment still remains the highest revenue generating segment for the company, with $500 million net sales in the third quarter, up 2.6% y-o-y.  Healthier inventory positions, coupled with expansion of the international loyalty programs to engage customers drove the segment’s sales, offset by declining software sales. GameStop’s game sales through the 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. Due to the expected decrease in the new game sales for the entire year, we might just see a decline in the revenues from this segment as well. However, the strong hardware demand in the U.S. might just offset the negative impact and provide stability to the company’s net revenue growth.

Furthermore, the contribution of the digital segment to the net revenues has been increasing at a much faster pace. In the third quarter, the digital receipts grew 52% y-o-y to $210 million, with 80% growth internationally, primarily due to the strong demand for digital content of Destiny and FIFA. As a result, digital gross profit grew 10.3% to $35.2 million. The digital revenues in the nine month period for the fiscal 2014 were $163.3 million, up roughly 8% y-o-y.

Technology Brands: The Focus Segment

GameStop’s revenues from the Mobile and consumer electronics increased a significant 103% y-o-y to $340 million in the nine months period of the fiscal 2014. Moreover, it accounts for nearly 6% of the company’s total revenue stream, up from 3% in 2013. This indicates the growing importance of the segment, which includes revenues from the sales of new and pre-owned mobile devices and consumer electronics, as well as all revenues from the Technology brands segment, which includes the operations of Simply Mac, Spring Mobile, and Cricket Wireless businesses. In the nine months period of the fiscal 2014 ended November 1, the company added 190 new technology brand stores, taking the total count to 408 stores. As a result of the acquisition activity in the technology brands business, the company witnessed an increase in gross margins, as the gross profits increased nearly 8.5% y-o-y in the 9 months period of the fiscal 2014. Through these 9 months, these brands have added $216 million to the top-line and nearly $23 million to the operating profit. Moreover, the company expects strong growth of the segment in 2015, due to a new cycle of Apple products.

The 408 Technology brands include 311 Spring Mobile stores, 51 Cricket Wireless stores, and 46 Simply Mac stores. GameStop has shown interest in some of the store locations of RadioShack, which declared bankruptcy earlier this year. RadioShack got the approval from a U.S. Bankruptcy Court Judge to auction its 2,000 stores. [6] GameStop has been aggressively expanding its Spring Mobile stores, and the strategy took a further step when the company bid for the right to take 163 leases from RadioShack. This allowed GameStop a two month period to decide whether to go forward with the deal or not. GameStop agreed to pay $15,000 for each RadioShack store lease. [7]

In short, we can expect an eventful 2015 fiscal year, with a strong focus on expansion of the technology brands.

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Notes:
  1. GameStop announces fourth quarter and full year 2014 earnings release date and conference call webcast []
  2. January NPD report 2015 []
  3. February NPD report 2015 []
  4. GameStop Q3 earnings call transcript []
  5. GameStop reports 2014 holiday sales results []
  6. RadioShack goes to auction to test hedge fund $200 mln deal []
  7. GameStop nabs 163 RadioShack leases for Spring Mobile push []