Game Stop Holiday Sales Preview: Analyst Expects Comps of 3% to 4%

GameStop (NYSE:GME) will report holiday sales (9-weeks ending December 31) before market open on Monday, January 9. It will not host a call to discuss results.

We expect the company to report holiday comps of up 3 – 4%, above Q4:11 comps guidance of flat to up 2.0% due to multiple high-profile releases that appealed to GameStop’s core gamer customer base, as well as improving industry trends. We believe GameStop sold roughly 25% of the ≈ 16 million units of Activision Blizzard’s (NASDAQ:ATVI) Call of Duty: Modern Warfare 3 sold worldwide during the holiday period, as well as at least one million premium Call of Duty: Elite subscriptions. In addition, we believe GameStop was the leading seller of Bethesda Softworks’ The Elder Scrolls V: Skyrim (over 2 million units from GameStop) and THQ’s (NASDAQ:THQI) Saints Row: The Third. According to NPD, combined software and hardware sales in November were up 5%, with software sales up for the third month in a row.

Expecting maintained FY:11 and Q4 guidance. FY:11 guidance is for revenue of $9.7 – 9.8 billion, mops of down 1% to flat, and EPS of $2.82 – 2.92, while Q4 guidance is for comps of flat to up 2.0%, and EPS of $1.66 – 1.76.

We expect the recent rebound in software sales growth to continue, driving software comps for FY: 12. Industry hardware and software sales trends have recently improved, and the company’s comps should benefit for the next year or so. In our view, hardware sales are likely to improve further when Microsoft (NASDAQ:MSFT) drops the price of the Xbox 360, compounding the benefit from Sony (NYSE:SNE) PS3 and 3DS price cuts.

A number of other factors should have a positive impact on GameStop shares in 2012. Digital sales, up 59% in Q3, will benefit from the rollout of Spawn Labs (cloud gaming) in 2012, and increased utilization of Impulse (PC downloads) and Kongregate (browser-based gaming). In addition, we expect multiple hardware introductions, including the PS Vita in February and the Wii U in 2012. Finally, the industry will be comping the Wii’s steep 2011 declines.

Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 10x our FY:12 EPS estimate of $3.30. Our price target reflects GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth, and its repurchase program.

Michael Pachter is an analyst at Wedbush Morgan.