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GameStop Down Despite Q1 Earnings Beat: What's the Catch?

Zacks Equity Research

Hopes of revival in GameStop Corp. GME shares were dashed further after its shares showed no signs of recovery despite delivering better-than-expected results in first-quarter fiscal 2017. Ever since, the company reported earnings on May 25, the stock has declined nearly 5%. In fact, in the past one year the company’s shares have declined 21%, underperforming the Zacks categorized Retail-Consumer Electronic industry’s whooping gain of 63.4%.

GameStop continued with positive earnings surprise streak for the sixth straight quarter. What came as a big surprise is that its top-line came ahead of the estimate after missing the same in the preceding three quarters.

What’s Hurting the Stock?

Despite reporting better-than-expected results, the company kept the outlook unchanged which is a cause of worry for investors. This can be attributed to delay in launch of "Red Dead Redemption: 2" and less visibility for the demand of Nintendo Switch for the entire year. GameStop doesn’t expect “Red Dead Redemption: 2” to be launched this fiscal year. The company continues to anticipate fiscal 2017 comps to be in the range of flat to down 5%. For the fiscal year, management also reiterated earnings forecast of $3.10–$3.40 per share.

Further, GameStop’s basic concern is the weakness prevailing in new software sales, which is heightening apprehensions about the impact of digital downloads on the same. New software sales witnessed 8.2% decline in first-quarter fiscal 2017. During fourth-quarter fiscal 2016 conference call, the company stated that it expects new software sales to decline mid-single digits in fiscal 2017.

Can Technology Brands & Collectibles Revive the Stock?

Both Technology Brands & Collectibles Business are growing at a very rapid speed. During the fiscal first quarter, the collectibles business sales surged 39.1% to $114.5 million buoyed by robust sales of Pokémon-related products. The company added nine Collectibles stores during the quarter, taking the total count to 95 stores. Meanwhile, Technology Brands sales jumped 21.5% to $201.4 million driven by year-over-year growth in AT&T authorized retail stores.

Management anticipates sturdy performance of Technology Brands and Collectibles to continue in fiscal 2017. Management also anticipates Technology Brands’ operating earnings to rise over 30% to $120 million during fiscal 2017 and to be $200 million in fiscal 2019. During fourth-quarter fiscal 2016 conference call, the company stated that it expects Technology Brands sales to increase 10–16% in fiscal 2017.

GameStop expects to enhance collectibles business approximately $650–$700 million during fiscal 2017 and anticipates becoming a $1 billion business by the end of fiscal 2019. In the second quarter, Collectibles sales are forecasted to increase by 35–40%. The company remains optimistic about non-physical gaming businesses and expects this category to reach approximately 50% of operating earnings by the end of fiscal 2019.

Conclusion

Dismal New software sales, delay in launch of "Red Dead Redemption: 2" and less visibility for the demand of Nintendo Switch for the entire year are no doubt a major cause of worry for investors right now. However, robust performance of both Technology Brands and Collectibles along with management’s optimistic view about both these segments may help in offsetting the laggards.

GameStop currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks worth considering in the retail space include Aaron's, Inc. AAN, Best Buy Co., Inc. BBY and The Children's Place, Inc. PLCE. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aaron's has reported better-than-expected earnings in the trailing four quarters, with an average beat of 10.6%.

Best Buy has an impressive long-term earnings growth rate of 11.8% and has also surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average earnings beat of 33.8%.

The Children's Place has reported earnings beat in the trailing four quarters, with an average of 36.6%.

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