GameStop Earnings: Still Increasing Market Share
GameStop (NYSE:GME) Q4:11 EPS in-line after significant charges. Revenue was $3.58 billion, versus our estimate of $3.64 billion, and consensus of $3.72 billion. Same store sales were down 3.6%, compared with our estimate of down 1.0%, and guidance of down 2.0 – 1.0%. Adjusted EPS was $1.73 (excluding $0.47/share for debt retirement costs, and impairment and restructuring charges), compared with our estimate of $1.76, the consensus estimate of $1.72, and guidance of $1.66 – 1.76.
Continued market share gains. GameStop’s new hardware sales were down 19.9% (vs. the industry’s down 22.6%, according to NPD) and new software sales were up 3.8% (well above the industry’s down 7.4%). In all, the company estimates a 270 basis point increase in its software market share in the US in the quarter.
Bullish 2012 comps guidance at the high-end. GameStop guided to FY:12 comps of down 1.5% at the low end to up 2.0% utoat the high end. Given the weak start to GameStop’s fiscal year according to NPD, guidance for positive growth was unexpected. Given very low comps guidance for Q1:12 (down 9.0% to 7.5%), GameStop’s full year guidance implies solid performance for Q2 – Q4.
Strong digital growth opportunity driven by DLC. Digital revenues were up 57% to $453 million for FY:11, and up 52.4% for Q4:11, with console digital up 64% and PC digital up over 42%. The company is tracking ahead of its goal for $1.5 billion of digital revenues by 2014, with 50% growth expected again in FY:12.
Weak Q1:12 comps guidance. In our view, weak Q1:12 comps guidance of down 9.0% to down 7.5% is attributable to a relatively light release schedule, and it appears that the release of the PS Vita will not drive sales sufficient to offset the introduction of the 3DS last year and the continued decline of Wii sales.
We do not expect US console software sales to turn positive until May of this year, meaning GameStop shares could remain challenged near-term. Although GameStop management spent time discussing digital and mobile initiatives on today’s call, we expect domestic console software sales growth reported by NPD to remain the key driver of GameStop’s share price month-to-month.
Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 9x our FY:13 EPS estimate of $3.60. 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.
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