Hold GameStop (GME)
GameStop reported earnings last night, and although sales were stronger than expected, EPS fell one cent short of estimates, and the stock is trading nearly 6% lower pre-market.
However, we’re going to Hold, for three reasons. First, the stock is still above its 52-week low, and support is just above 20 (GME closed at 20.46 in June.) Second, expectations for the second half of the year are high, so investors who are able to hold on may be rewarded soon. And third, our loss remains a manageable 11%.
As for the earnings, revenues actually grew 3.7% year over year; analysts were expecting a 0.6% decline. Same-store sales fell slightly in the U.S. but rose almost 10% at international stores, for overall growth of 1.9%. The largest contributors to growth were hardware, collectibles and the Tech Brands stores.
Collectibles continue to do well; sales increased 36% in the quarter. The release of the Nintendo Switch bolstered new hardware sales, which were 14.8% higher than in the same quarter last year. And the tech brands stores, which include AT&T and Simply Mac stores, are now GameStop’s second-largest profit center. The stores’ margins are high, and as I noted Wednesday, sales are expected to receive a boost after the iPhone 8 is released in September.
New software sales are also expected to improve in the second half of the year, with some big releases, including new Assassin’s Creed and Super Mario titles, expected to drive 5% to 10% revenue growth. New software sales fell 3.4% this quarter, due to a dearth of new AAA games.
Sales of pre-owned games, still GameStop’s largest source of revenue, also fell in the latest quarter, dropping 7.5%. That number is also expected to improve next quarter, thanks to higher inventory and better positioning in the console cycle.
GameStop’s margins were about flat in the quarter, and management reiterated their full-year guidance.
The stock’s initial response was positive, but that has reversed this morning. As I noted Wednesday, the stock also gapped down after the last two earnings reports, despite beating expectations. While the reaction is disappointing, with the stock still above 20, and the future still bright, we’ll continue to Hold.