GameStop (GME) Q1 Earnings: Will The Stock Disappoint?

GameStop Corp. (NYSE:GME) is slated to report first-quarter fiscal 2016 results on May 26 after the closing bell. The big question facing investors now is, whether the company will be able to post a positive earnings surprise in the quarter to be reported.

Notably, in three out of the last four quarters, the company surpassed the Zacks Consensus Estimate with a positive earnings surprise of 11.2%. Let’s see how things are shaping up for this announcement.

Zacks Model Shows Unlikely Earnings Beat

Our proven model does not conclusively show that GameStop is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as GameStop’s Earnings ESP is -6.56% as the Most Accurate estimate stands at 57 cents, whereas the Zacks Consensus Estimate is pegged higher at 61 cents.

Also, GameStop carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Influencing this Quarter

GameStop’s basic concern is the weakness in new software sales as well as the raising apprehensions about the impact of digital downloads on the same. New software sales witnessed a 9.7% decline during the holiday season. Notably, the new software sales had decreased 10.8% in fourth-quarter fiscal 2015 too. In fiscal 2016, the company expects new software sales to decline in the range of 5–10%.

For the fiscal first quarter, management projects total sales to decline in the range of 7–4%, and comps decline in the band of 7–9%.

The video game industry is highly competitive, and shoppers now have many alternatives to choose from when it comes to software, hardware, and game accessories for their video game consoles and personal computers. Retail bigwigs such as Wal-Mart (NYSE:WMT), Target, Best Buy, and Game Group, who have also entered the video game market, can dent GameStop’s sales and margins.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

TiVo Inc. (NASDAQ:TIVO) has an Earnings ESP of +25.00% and a Zacks Rank #1.

Best Buy Co., Inc. (NYSE:BBY) has an Earnings ESP of +2.86% and a Zacks Rank #2.

DSW Inc. (NYSE:DSW) has an Earnings ESP of +2.17% and a Zacks Rank #3.