GameStop shares slump following 1Q report

GameStop posts strong 1st-qtr results and raises outlook, but shares skid after long run

Associated Press

NEW YORK (AP) -- Shares of GameStop Corp., which have made strong gains in 2013, sank Friday in spite of the video game retailer's better-than-expected quarterly results and increased outlook.

THE SPARK: GameStop, the world's largest video gamer retailer, posted better-than-expected first-quarter results after the market closed on Thursday. The company said its net income and revenue both fell, but both its income of 46 cents per share and revenue of $1.87 billion surpassed analyst estimates.

Analysts were expecting earnings of 40 cents per share on revenue of $1.82 billion, according to FactSet.

THE BIG PICTURE: GameStop's second-quarter forecast was weaker than expected, but for the full year the company said it now expects to earn $2.95 to $3.15 per share, up from its previous estimate of $2.75 to $3.15 per share.

Analysts expected $3.10 per share on average.

Earlier this week, Microsoft Corp. unveiled its new Xbox One gaming system, and although there were rumors to the contrary, gamers will be able to pay used games on the system. GameStop makes money from letting people trade in used games for new ones, so that's good news for GameStop.

The company's increased guidance reflects the first-quarter results and the fact that both Microsoft and Sony Corp. will start selling new systems this year. In the first quarter, sales of older systems declined as consumers waited for the newer products.

THE ANALYSIS: Sterne Agee analyst Arvind Bhatia said investors are worried about the future market for used games and are hoping for a clearer sign of Microsoft's plans.

"Confirmation of another console launch this year (Xbox One) adds to visibility on new software trends next year and beyond, but concerns on used games are weighing on the stock," he wrote.

Bhatia maintained a "Buy" rating on GameStop shares with a price target of $46 per share, and raised his net income estimate to $3.08 per share from $3.

Wedbush analyst Michael Pachter said the Grapevine, Texas, company is gaining market share and he does not expect gaming system makers to block used games. He rates GameStop shares "Outperform" with a price target of $49 per share.

SHARE ACTION: GameStop shares lost $4.01., or 11.1 percent, to $32 in afternoon trading, after earlier trading as low as $30.94. The stock is up 36 percent since the company reported its fourth-quarter results on March 28, and it reached a four-year high of $39.87 on May 17.

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