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Summary

  • GameStop Corp. exceeded earnings expectations.
  • Management provided optimistic guidance.
  • Management did not address the long-term future of its high-margin used video game segment.

Background

On August 21, 2014, GameStop Corp. (NYSE: GME) reported 2Q 2014 earnings of $24.6 million or $0.22 per share on sales of $1.73 billion compared to earnings of $10.5 million or $0.09 per share on sales of $1.38 in the same period in the prior year. These estimates were above Estimize-reported consensus estimates of $0.19 per share on sales of $1.66 billion. These figures are based on a diluted share count of 114.3 million in 2Q 2014 and 119.2 million in 2Q 2013.

GameStop Corp. is a retailer for video games and consumer electronics and wireless services. The company's main products are new video games (28.7% of sales, 23.3% gross margin), new video game hardware (19.2% of sales, 9.5% gross margin), used video game products (32.2% of sales, 47% gross margin), video game accessories (6.2% of sales, 39% gross margin), digital video game sales (3% of sales, 65% gross margin) and mobile/consumer electronics (6.5% of sales, 36.1% gross margin).

GameStop doesn't have major competition for pre-owned video game sales, but competes with most major big-box stores such as Best Buy (NYSE: BBY), Target (NYSE: TGT), and Wal-Mart (NYSE: WMT) for new video game sales.

Key Points

  • Management repurchased $75.5 million of stock during 2Q 2014, $329.4 million left on its existing repurchase authorization
  • Issued dividend of $0.33
  • Same store sales increased 21.9%
  • New software sales grew 15.6%
  • Digital sales rose 5.9% to $52.3 million
  • Pre-owned sales grew 5.5%

Guidance

  • Fiscal Year per share earnings between $3.40 and $3.70
  • Full-year same-store sales expected to increase between 6% and 12%
  • 3Q EPS expected to be between $0.58 and $0.64
  • 3Q Same-Store sales increase between 1% and 5%
  • Used game sales were up 5.5%

What to look for in Q3

New products and services

Management stated that the company is expanding its mobile and consumer technology and plans to shift the company towards this segment rather than rely on solid-media sales. It will be interesting to see how these services compete with current players in the market, such as Steam.

Recovery of CEO

GameStop's CEO was recently diagnosed with a brain tumor, and while he is expected to make a full recovery and be back on the job within a few weeks, it remains to be seen how much influence he has in the company's near-term strategy.

Acquisitions

Management mentioned that the company intends to continue growing through acquisitions, so we will probably see the company continue to add stores and expand its footprint as it transitions towards digital technology.

Positioning going into the holiday season

Management mentioned that there are about two dozen titles that it expects to begin selling in this quarter and into the fourth quarter. In the quarter, the company's new software sales grew by 15.6% compared to the same period last year, and management confidently stated that they expect to see "continued double digit digital category growth in the foreseeable future."

Quick Take

The company had a strong quarter, and management was straight-forward in examining the numbers. After the performance discussion, management gave commentary on its strategy and stated that they have a "robust pipeline of additional acquisitions and development opportunities in the tech brand space."

While management was upbeat regarding its growth in digital sales, there was no mention of in-store sales, which is troubling given that brick-and-mortar retail sales have been in a general decline. GameStop has very little competition in the used games market, and achieves very high gross margins on its used products (47%) but management did not explain how this market has been progressing, as solid-media has become less and less prevalent. The company's digital sales of $52.3 million represent 5.9% growth over the prior year, and have a gross margin of 65%, but only represent about 3% of the company's $1.73 billion in sales in the quarter.

I feel as though management painted an extremely optimistic picture of the future given that its core business of high-margin used games is facing an inevitable decline over the next few years as consumers ditch solid media in favor of digital products. While the company has shown rapid growth in its high-margin digital sales, it still represents only 3% of total sales. The company has been seeing a substantial boost since the new consoles came out and consumers exchanged their previous-generation consoles and games for new ones, but this console cycle feels more like a temporary lifeline than a reliable source of future sales.

Transcript and Investor Presentation which includes sales numbers are available here and here respectively.

Source: Breaking It Down: GameStop's 2Q 2014 Earnings Call