Hold GameStop (GME)
GameStop reported first-quarter earnings that beat expectations last night. However, the stock declined in after-hours trading.
Adjusted EPS fell 4.5%, to $0.63, but beat the consensus analyst estimate of $0.51 by a wide margin. Revenues also beat estimates, rising 4.1% year-over-year to $2.05 billion (analysts were expecting $1.94 billion.)
Nintendo’s new Switch console contributed to a 25% increase in new hardware sales. However, new software sales still fell 8%, and pre-owned sales (which account for 36% of profits) fell 6%. GameStop’s new businesses remain healthy: digital sales grew 3%, collectibles sales rose 39% and technology brands sales rose 22%.
International sales outpaced U.S. sales, in part because Nintendo’s non-U.S. Switch distribution was more generous toward GameStop. The international stores have also been able to convert square footage to collectibles more quickly.
The tech brands stores saw some expected weakness because of a lack of new phone launches; management expects a big bump when the iPhone 8 launches in the second half of the year.
Management reiterated full-year guidance of $3.10 to $3.40 in EPS; analysts’ average estimate was $3.32. For the full year, management expects new hardware sales to be flat or slightly higher, while new software and pre-owned sales are both expected to decline by mid-single digits. Tech brands sales are expected to rise 10% to 16%, while collectibles sales are expected to rise 30% to 40%. Comp store sales are expected to be between flat and 5% lower.
In other words, the headline numbers were good, but GameStop is still working out some kinks as it transitions. The stock initially declined nearly 7% in after-hours trading, but is now down only about 3%, and looks set to open around 22. As I noted Wednesday, we’re comfortable holding as long as GME remains above support at 20, where the stock bounced in March and November. For now, the appropriate rating remains Hold.