Here’s Why GameStop is an Outperform

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Revenue was better than expected, but still down year-on-year, despite an extra retail week. Revenue was $3.56 billion vs. our estimate of $3.42 billion and consensus of $3.45 billion. “Other” (primarily used electronics) was up ≈ $104 million, but did not fully offset declines for new hardware and new and used software.

EPS exceeded level implied by pre-announcement. Adjusted EPS was $2.16, compared with our estimate of $2.09, consensus of $2.09, and guidance of $2.07 – 2.27. When GameStop (NYSE:GME) reported holiday sales results in January, it disclosed that Q4 EPS was expected to come in at the low end of the guidance range of $2.07 – 2.27; however, management proved to be overly conservative. Despite continued industry weakness, Q4 EPS was up $0.43 year-on-year due to share buybacks ($0.26), an extra retail week ($0.08), and margin expansion and cost control ($0.09).

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Conservative FY:13 EPS guidance does not include share repurchases. Initial EPS guidance is $2.75 – 3.15, implying a slight decline at the high end and a 7 percent decline at the midpoint after 10 percent growth in FY:12. However, assuming buy backs of 10 million shares in FY:13 (GameStop has $400 million remaining in its authorization), we estimate a pro forma range of $2.88 – 3.30, which implies 4 percent at the high end. Investors should view this as a positive given that gamers are likely to buy fewer games ahead of the holiday next-gen console launches. We note that management has a history of being overly conservative with guidance…

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