GameStop Corporation (GME, Financial) is set to release its fourth quarter and full fiscal 2014 earnings report on March 26. Although the gaming industry witnessed a slowdown in sales of software titles during 2014, GameStop said it was confident of high revenues from sales of new video game hardware on the back of a strong demand for eighth generation consoles such as Sony’s (SNE, Financial) PlayStation 4 and Microsoft’s (MSFT, Financial) Xbox One. The company competes with other retailing giants such as Amazon.com Inc. (AMZN, Financial), Wal-Mart Stores Inc. (WMT, Financial) and Best Buy Co. Inc. (BBY, Financial) in the consumer electronics marketplace.
For the third quarter of 2014, GameStop reported a 0.7% year-over-year decline in revenues to $2.09 billion, missing the consensus estimate of $2.2 billion owing to a 2.3% decline in comparable-store sales and the negative impact of foreign currency headwinds. The company’s net earnings for the quarter fell 6.3%, with the adjusted EPS of 57 cents a share, falling short of the consensus estimate of 60 cents a share. Following the results, GameStop saw its shares declining as much as 12%. The company also disappointed investors with its revised guidance for the fourth quarter that projected comparable-store sales of -5% to +2% and EPS of $2.08-$2.24 a share, below the expected $2.28 per share. Further, the company also revised forecasts for its full fiscal 2014 with the new guidance of $3.40-$3.55 a share falling short of the expected $3.68 a share.
Technology Brands Segment Likely to Boost Revenues
GameStop saw revenues from its consumer electronics and mobile division grow significantly during 2014, with a 103% year-over-year growth to $340 million during the first three quarters of the fiscal. The division also contributes almost 6% to the company’s overall revenue stream, including revenues generated from the sales of new and pre-owned consumer electronics and mobiles. Further, GameStop also added 190 new technology brand outlets such as Cricket Wireless, Spring Mobile and Simply Mac during the first three quarters and increase gross profit margins by almost 8.5% year-over-year on the back of certain acquisitions. The technology brands division is also expected to boost sales during the upcoming quarters owing to Apple’s impending new product cycle. Consequently, experts are looking at an eventful fiscal 2015 with GameStop focusing on expanding its technology brands division.
Weak Holiday-season Games Sales To Drag Revenues
GameStop’s global sales for the nine-week holiday season ending January 3 was down 6.7% year-over-year to $2.94 billion. The company’s comparable store sales also declined by 2.7% at its international stores, while the decline was 3.3% year-over-year for the US-based stores. After a massive 12% decline in comparable-store sales during November 2014, GameStop gained some of its lost ground in December 2014, when it saw a 4.4% year-over-year growth in sales.
At the same time, GameStop will be looking at its pre-owned and value product division to push revenues upwards in the fourth quarter. The segment had contributed $500 million in net sales to the company’s third quarter revenues. However, the expected decline in sales of new games for fiscal 2014 is likely to impact revenues from the Pre-owned segment as well, although the negative impact could be offset by strong demand for pre-owned hardware in the US.
On the up-side, GameStop could see growth in revenues from its digital segment that has been increasingly contributing to the company’s overall revenues. The first three quarters of fiscal 2014 saw the segment generating $163.3 million in revenues, up nearly 8% year-over-year.
Final Thoughts
Experts point out that the weak fourth quarter results forecasted for GameStop are mostly a hangover from the unusually robust hardware sales in Q4 2013 that saw the launch of new generation gaming consoles from Sony and Microsoft and resulted in an 8% growth in comparable-store sales. GameStop has been focusing on all the right avenues to further revenues growth and its focus on the technology brands division is likely to push revenues for the fourth quarter and full fiscal 2015, with support from the digital segment. However, sluggish demand for new and pre-owned games software combined with foreign currency headwinds could have a negative impact on GameStop’s results. Consensus is down to $2.14 a share for Q4 from the $2.28 of three months ago, while for the full fiscal, experts foresee earnings of $3.55 a share at the top end of the company’s guidance. GameStop shares have mostly traded in the $32-$42 range in the last three months, with the shares hitting a 52-week low of $31.69 in Jan 2015 following the company’s holiday-season sales report. The GameStop stock carries a price estimate of $39 a share, which is lower than its current price, and a ‘buy’ guidance.
