We have maintained our long-term Neutral recommendation on GameStop Corporation (GME) with a target price of $31.00, as risk reward remains fairly balanced for the stock at this juncture.
Why the Reiteration?
GameStop is well positioned to take the advantage of the growing market for video game products and PC entertainment software. The company’s strategy is to evolve through store expansions in favorable localities, by providing the largest title collection of video games and by leveraging its first-to-market distribution network to offer the latest hardware and software releases.
The company holds a significant position in the used video game products market and provides a greater selection of used video game products for both current and previous generation platforms. This has largely helped the company to remain afloat amid the challenging environment as the market for used video game products has been resilient to the recent economic downturn.
Despite these positives, GameStop forecasted a tough first half anticipating lower sales. The company expects a sales decline of 6% – 8.5% for the first quarter of fiscal 2013 with comparable-store sales to decrease between 5.5% and 8%. For fiscal 2013, the company expects sales to remain flat or decline by 8%, and comparable-stores sales to be in the range of negative 6% to positive 1.5%.
Further, the video game industry is highly competitive, and video game shoppers now have many alternatives to buy software, hardware, and game accessories for video game systems and personal computers. Alongside, retail heavyweights such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT) and Best Buy Co., Inc. (BBY), have entered the video game market. It is apprehended that these larger retailers could dent GameStop’s sales and margins.
Currently, shares of GameStop maintain a Zacks Rank #3 (Hold).
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