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Why Has GameStop Lost Its Sheen?

Zacks Equity Research

Video game retailer GameStop Corp. (NYSE:GME) saw its market cap eroding 16.9% in the past one week after it lowered its earnings outlook.

This Grapevine, Texas-based company now projects fourth quarter earnings between $1.85 and $1.95 and fiscal year 2013 earnings in the band of $2.96 to $3.06 per share. The Zacks Consensus Estimate fell 10.3% and 6.8% to $1.92 and $3.02 for the fourth quarter and fiscal 2013, respectively in the past 7 days. This led us to downgrade GameStop from a Zacks Rank #3 (Hold) to a Zacks Rank #4 (Sell).

Shares crashed nearly 20% in a single day when the company reported sluggish sales of Microsoft Corp.'s (NASD:MSFT) Xbox 360 and Sony Corp.'s (NYSE:SNE) PlayStation 3 software during the holiday period, which caused a 22.5% fall in new software category sales.

GameStop declared that global sales during the nine-week holiday period ended Jan 4, 2014 rose 9.3% to $3.15 billion. Total comparable-store sales rose 10.2%, marking an increase of 7.1% in the U.S. and 17.4% in international locations. The increase was driven by new video game console sales such as Xbox One and PlayStation 4 that drove a 99.8% surge in new hardware sales.

GameStop, which competes with Amazon.com Inc. (NASD:AMZN), now envisions comparable-store sales for the fourth quarter and fiscal 2013 to dovetail with the upper end of the previously provided guidance range. The company had predicted comparable-store sales to increase by 2% to 9% during the fourth quarter and by 1.5% to 4.5% during the fiscal year.

The pre-owned category sales rose 7%. Management now anticipates gross margins for the pre-owned category to be 46%–49% for the fourth quarter and the fiscal year. The Other category sales climbed 4.8%. Within this category, digital receipts increased 14.9% to $207.3 million while mobile sales witnessed a 23.8% rise to $94.8 million.

GameStop’s worldwide sales through mobile, web-in-store, pick-up at store and e-Commerce inflated 57%. Sales through mobile sites rose 47%, web-in-store and pick-up at store sales together marked an increase of over 120% and sales through the company’s website grew 37%.

The operator of 6,488 stores repurchased 800,500 shares at a price $49.39 per share, aggregating $39.5 million during the holiday period. The company informed that at the end of the holiday period, it still had the authorization to buy shares worth $467.1 million.

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