GameStop (GME) Tops Q2 Earnings, Sales Lag; Stock Down

GameStop Corp. (NYSE:GME) continued to impress investors as it reported better-than-expected earnings for the third consecutive quarter in second-quarter fiscal 2016. The company recorded adjusted earnings per share of 27 cents in the quarter that beat the Zacks Consensus Estimate by a penny, but declined 12.9% year over year.

On the other hand, GameStop’s revenues fell 7.4% year over year to $1,631.8 million and also missed the Zacks Consensus Estimate of $1,722 million. Following the earnings release, the company’s shares declined 7.8% during the after-hours trading session yesterday. The second-quarter results were hurt by a sharp decline in comparable store sales (comps), which were primarily affected by a fall in video games and hardware sales.

Consolidated comps decreased 10.6%, reflecting a decline of 12.5% at domestic locations and 5.9% at international locations. By sales mix, new video game hardware sales plunged 33.4% to $216.4 million, whereas new video game software sales fell 18.2% to $382.2 million.

The Mobile and Consumer Electronics category showed strength, with sales surging 43% to $203.3 million. However, Video Game Accessories sales recorded a 5% decline to $119.5 million.

The Pre-owned and Value Video Game Products category’s sales dropped 3.2% year over year to $542.6 million. Nonetheless, an increase in DLC for The Division and console digital currency drove 3.3% growth in adjusted digital receipts to $205.6 million.

The Technology Brands segment reported revenue growth of 54.6% to $175.9 million. In an effort to augment its Technology Brands segment’s revenues, GameStop completed the acquisition of AT&T, Inc.’s (NYSE:T) authorized retailers – Cellular World Corp., Midwest Cellular as well as Red Skye Wireless. Following the acquisition of these AT&T’s authorized retailers, the company has added 507 more stores to its Technology Brand portfolio. In the reported quarter, it also opened 5 Technology Brand stores. The company now has 1,566 Technology Brand stores.

During the reported quarter, gross profit climbed 6.4% to $617.7 million, while gross margin expanded 500 basis points to 37.9%. Rapid growth across the digital, mobile and collectibles categories backed the improvement.

GAMESTOP CORP Price, Consensus and EPS Surprise

GAMESTOP CORP Price, Consensus and EPS Surprise | GAMESTOP CORP Quote

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $289.5 million, net receivables of $126.6 million, and shareholders’ equity of $2,151 million.

The company did not repurchase any shares in the reported quarter. However, it intends to buy back between $75 million and $125 million of shares in fiscal 2016.

The company declared a quarterly cash dividend of 37 cents per share, which is payable on Sep 22, to shareholders as of the close of business on Sep 9, 2016.

Guidance

Management reiterated its fiscal 2016 earnings guidance. It envisions earnings in the range of $3.90–$4.05 per share for fiscal 2016 and between 53 cents and 58 cents for the third quarter.

For the fiscal third quarter, management projects sales growth of 2% to 5%, whereas comps are expected to range between a 2% decline and a 1% increase. For fiscal 2016, comps are expected to decline in the range of 4.5% to 1.5% in comparison to the previous estimate of negative 3% and 0%.

The current Zacks Consensus Estimate for the third quarter and fiscal 2016 stands at 55 cents per share and $4.00 per share, respectively.

Zacks Rank

At present, GameStop carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector are American Eagle Outfitters, Inc. (NYSE:AEO) and hhgregg, Inc. (NYSE:HGG) , both holding a Zacks Rank #2 (Buy).