Will GameStop Crush Earnings Estimates?

One of the premier American video game, consumer electronics, and wireless services retailers, GameStop Corporation (NYSE:GME), is set to report its earnings today after the closing bell. The company was founded in 2000, and it is headquartered in Grapevine, TX, USA.

While many consumers might be fans of the company, many investors see GameStop as an archaic company that is about to go out of business soon if it does not maintain an aggressive expansionary attitude, or if it does not innovate and reinvent itself in today’s ever-changing market.

But first up, the company’s current quarter report and some of the key business highlights for this in focus, and embattled, company:

GameStop’s Prospects

GameStop offers a trade in program, in which gamers can sell their old and used games provided they are in an acceptable and working condition, for newer games, while paying the price difference. This has always been a source of fat margins and revenue for GameStop.

According to the Wall Street Journal, the proceeds from used games are used to boost sales of other merchandise. However, it isn’t very promising when your business mainly relies on one component or revenue producer, as it means that the entire business can be in peril if the environment changes quickly.

This was unfortunately the case with RadioShack Corporation (NYSE:RSH), electronics retailer whose stock is almost a penny stock now. RSH’s last EPS surprise was abysmal, but many investors and analysts are thinking that GME will not suffer the same fate this quarter.

Per the Wall Street Journal, shifting technology may turn GME from a profitable business into a dinosaur, as the stock has been slacking by 35 percentage points behind the S&P 500 last year. The good thing going for GME is its stock’s low price point, only about $40/share, and it is amazing how the company has generated annual EPS growth of 19% over the last decade of its operations. Another positive element for GME is its recent expansion into the mobile services with a partnership with AT&T (NYSE:T) Incorporation, and servicing electronics from Apple (NASDAQ:AAPL).

GME has the potential to grow if the firm takes advantage of the burgeoning video game and electronics market. GME needs to maintain its business through ambitious branching out, and expansion. A venture in iDevice and gaming tablets would help solidify GME and their outlook.

Additionally, the company’s PowerUp Rewards system manages to lure gamers to the company’s stores. Investors should tune in for the conference call and make sure to look for any slippage in GME’s gross margin. Still, in the last year, GME outperformed the Zacks Consensus Estimate by an average of 42.5%.

Analysts’ Commentary

Analyst Curtis Nagle, from Bank of America’s prominent investment arm, Merrill Lynch, has reiterated his bullish stance on GME and is hoping for a positive earnings report, with a price target of $56/share. Nagle also hopes that the conference call does not outline any bad prospects that could be in store for GME, which could possibly see investors and traders dumping the stock in afterhours trading.

July software sales for GME slumped by about 15%, but Nagle claims that the slow sales were expected due to no major launches. Hardware sales were solid with Xbox One and PS4 selling very well.

Many analysts expect strong console sales to continue in 2015, and many reiterated a “buy” rating, stating that it is the “best positioned player to leverage a strong gaming cycle that is still in early stages”. Sean McGowan from Needham & Company adjusted and lowered estimates, but had still reiterated a “buy” rating with a price target of $55/share.

Bottom Line

GME maintains a Zacks Rank #3 (Hold) and it is looking good for this earnings report. Analysts have upgraded their ratings and expectations for the current quarter’s earnings. Analysts have upped their EPS estimates from $0.17/share to $0.19/share from approximately 90 days ago. Last quarter, GME reported sales of $9,040 million, and a net income of $354 million, and a diluted net EPS of $2.99/share.

It is likely that GME will beat earnings estimates and expectations this season, as it carries an Earnings ESP of +5.26%, as the most accurate estimate stands at 20 cents per share, while the Zacks Consensus Estimate stands at 19 cents per share, but investors will have to wait and see with the report to find out if GME can live up to expectations this time around, and if it can make it two beats in a row this quater.

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