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Have you Offloaded GameStop (GME) from Your Portfolio?

Zacks Equity Research

Shares of GameStop Corp. GME have declined 21.3% in the past six months, underperforming the Zacks categorized Retail-Consumer Electronic industry’s increase of 11.6%. The decline can primarily be attributed to dismal top-line performance, tepid guidance and weakness in new software sales.

The challenging retail landscape, aggressive promotional strategies, waning store traffic and lower-than-expected top-line for the third consecutive quarter have been weighing on the company’s performance. Further, we noted that both the top line and bottom line continued to decline year over year.

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 19.3% decline in the fourth quarter of fiscal 2016. In fiscal 2017, the company expects new software sales to decline mid-single digits.

The Zacks Rank #5 (Strong Sell) company provided bleak outlook for fiscal 2017.  GameStop expects fiscal 2017 total sales to be down 2% to up 2% and projects comps to be flat to down 5%. Management expects operating margin in the band of 6.5–7%. For the fiscal year, management envisions earnings in the range of $3.10–$3.40 per share, sharply down from the fiscal 2016 earnings of $3.77 per share.

Let’s look at GameStop earnings estimate revisions in order to get a clear picture of what analysts are thinking about the stock. In the past seven days, the Zacks Consensus Estimate for fiscal 2017 declined 47 cents to $3.25, while for the first quarter estimates have decreased 18.8% to 52 cents. Moreover, for fiscal 2018 the Zacks Consensus Estimate has moved down 53 cents to $3.35 in same time period.

Stocks to Consider

Better-ranked stocks in the retail sector include Kate Spade & Company KATE, The Children's Place, Inc. PLCE and Foot Locker, Inc. FL. Kate Spade & Company and Children's Place sport a Zacks Rank #1 (Strong Buy) while Foot Locker carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kate Spade & Company delivered an average positive earnings surprise of 14.6% in the trailing four quarters and has a long-term earnings growth rate of 28.3%.

Children's Place delivered an average positive earnings surprise of 39% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Foot Locker delivered an average positive earnings surprise of 2.2% in the trailing four quarters and has a long-term earnings growth rate of 9.7%.

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