When video game retailer GameStop (GME, Financial) released its third-quarter earnings on November 20, it was a dismal set of numbers that disappointed speculative analysts as well as investors. Soon after the results were out, the shares of the retailer were down 14.8% in pre-market trading. Let’s take a sneak peek into the numbers posted for the quarter which disappointed the Street. And maybe also try to decipher any other major highlights of the quarter. Here’s the total story.
The segment-wise quarter numbers
GameStop reported earnings of $0.57 a share during the quarter, which missed the $0.61 per share as earnings estimated by analysts. Revenue fell around 0.9% year-over-year to $2.09 billion, below analyst estimates of $2.2 billion. Comparable sales fell 2.3% from a year-ago quarter, and this decline could be attributed to the delay of the Assassin’s Creed: Unity software release. New hardware sales, however, grew 147.4%, while software sales dipped 34.4% from the year-ago quarter.
The whopping improvement in hardware sales owed to the robust demand of Sony Corporation’s (SNE, Financial) PlayStation 4 and Microsoft Corporation’s (MSFT, Financial) Xbox One hardware. On the contrary, new video games software plummeted to $743.7 million as the prior-year quarter benefitted from strong releases of AAA titles such as Grand Theft Auto V, Battlefield 4, Batman: Arkham Origins, Pokemon X/Y and Assassin’s Creed IV: Black Flag.
In the video games accessories’ sales surged 35.3% to $132.6 million whereas sales in the digital category improved 19.3% to $54.9 million. On the other hand, mobile and consumer electronics’ sales doubled to $126 million which was majorly due to contributions from Spring Mobile. The technology brands segment that contributed 11% to the operating earnings is expected to sustain its growth momentum, attributable to the collaboration with AT&T (T, Financial) and the new range of Apple (AAPL, Financial) products.
During the quarter, gross profit increased 4% to $622.2 million, attributable to fall in cost of sales. Gross margin expanded 130 bps to 29.7%. However, operating income slid 17.7% to $89.8 million, whereas operating margin contracted 90 bps to 4.3%.
Future guidance remains soft
Management has hinted that the fall in sales of the previous-generation software could be attributed to the transition to next-generation consoles and shift in titles out of 2014. This has compelled them to trim the comparable store sales in the band of negative 5% to positive 2%. Also, for the fiscal year GameStop now expects comp growth of 2% to 5%, down from 6% to 12% increase projected earlier.
For the earnings, the company expects it to be in the range of $2.08 per share to $2.24 per share for the fourth quarter and between $3.40 a share to $3.55 a share for the fiscal year 2015. Earlier, the company had anticipated earnings to be in the band of $3.40 a share to $3.70 a share for the full year.
Share buyback continues
The retailer closed the quarter with cash and cash equivalents of $374 million, and it has bought back 3.58 million shares worth $144 million. Earlier this month, the company had approved a $500 million share buyback program that overrides the remaining $176 million under the former authorization.
It has also declared a dividend of $0.33 a share for the quarter that would be payable on December 16, to shareholders. This signifies that GameStop’s miss on earnings did not affect its pay-out plans for the investors. So, the investors did get the cherry even when the company sales are down compared to last year.
Analysts retain buy rating
TheStreet Ratings team still rates the GameStop stock as a Buy with a ratings score of B-. They have recommended the stock should be bought as it gives investors a better performance opportunity than most stocks. The strength of the company can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income and largely solid financial position with reasonable debt levels.
Thus, investors should hold on to their investments and not sell off the stock after its low performance in the third quarter.
Conclusion
GameStop still upholds a strong buy rating after the earnings release, so investors should watch the coming quarter results before taking a final decision on whether they should exit their investment in the stock or hold on to it in the long term.
