GameStop’s Q1 2015 Earnings Review: Strong Digital Growth and Robust Software Sales Drive Top-line Growth

GameStop (NYSE:GME) reported an impressive first quarter earnings report for the fiscal 2015, with same store sales growth of 8.6%, compared to 5.8% growth in the same period last year. The company’s net revenues rose 3.2% year-over-year (y-o-y) to $2.06 billion, driven by robust growths in new video game software sales, technology brands, as well as in the digital segment. On the other hand, the pre-owned products segment witnessed 3.4% y-o-y decline, whereas the new video game hardware segment witnessed flat growth of merely 40 basis points growth in sales. On a non-GAAP basis, digital receipts grew 17.2% y-o-y to $222.2 million, led by growth in downloadable content (DLC) for Evolve and Mortal Kombat, as well as mobile and Steam Cards. ^[1] Revenues from mobile and consumer electronics grew 34% y-o-y to $137 million, owing to 70% growth in the Technology brands revenues ($102.2 million). As a result, diluted EPS grew 15% y-o-y to $0.68.

Our price estimate for the company’s stock is $44, which is roughly 10% above the current market price.

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Robust Software Sales Provide Strength To Top-line Growth

According to the research group NPD, gamers spent $595 million on new physical software, hardware, and other accessories, up 3% year-over-year (y-o-y) in April 2015. However, the hardware sales were down 4% y-o-y to $184 million, due to a strong comparison with last year’s April sales, as well as a 55% decline in demand for previous generation consoles. On the other hand, software sales witnessed 13% y-o-y growth to $256 million. ^[2] For the first trimester, hardware sales were down 10% y-o-y, whereas the software sales strengthened by roughly 5%.

In the first quarter, the company’s software sales grew 9.6% y-o-y to $614 million, driven by strong sales of the new titles in the market, such as Electronic Arts’ (NASDAQ:EA) Battlefield Hardline and Warner Bros’ Mortal Kombat X. Capturing a significant market share of these key titles led to a record Q1 new software market share of 45%. In the month of April, GameStop managed to sell 57% of all the Xbox One and PS4 software titles.

GameStop expects the software sales to decline slightly in the second quarter, as the company expects that the two biggest title releases: Bewitcher 3 and Batman Arkham Knight might not sell as many units as the last year’s two biggest titles in the same period: Watchdogs and Mario Kart.

Sluggish Growth In Other Segments

GameStop’s new video game hardware segment grew only 0.4% in the first quarter, but the growth was 5.1% if we exclude the effect of FX. However, the little growth was driven by strong sales of PS4 handheld units. GameStop nearly doubled its Xbox One market share during the month of April, and drove nearly two-thirds of Xbox One industry growth during the month. The company sold 46% of all the Xbox One and PS4 hardware and software combined during Q1, up 610 basis points y-o-y.

On the other hand, Pre-owned products segment witnessed 3.5% y-o-y decline in the revenue growth, as the growth in next-generation pre-owned products was offset by declining demand for previous generation pre-owned products. However, the segment witnessed margins as high as 49.1%, which is 140 basis points higher than that in Q4 2014.

Accelerated Development In Technology Brand Segment

In the first quarter, Technology Brands revenues increased 70% y-o-y to $102.2 million, with the addition of 65 net new stores.  In February 2015, GameStop showed 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. ^[3]  GameStop, however, won the auction for the right to take over nearly 163 RadioShack stores, with a payment of $15,000 per store to take over the leases. ^[4] GameStop expects a potential IRR of 25% from these stores. High margins in this segment led to a 360 basis point improvement in the margins of the mobile and consumer electronics segment to 39.8%. The company plans to open 450-550 technology brand stores in fiscal 2015.

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1. GameStop, Q1 2015 earnings call transcript [↩]
2. April 2015 NPD games data [↩]
3. RadioShack goes to auction to test hedge fund $200 mln deal [↩]
4. GameStop wins bidding for more than 160 RadioShack stores [↩]