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Stronger Sales Of Xbox One And PS4 Consoles Lead GameStop Higher Today

Stronger Sales Of Xbox One And PS4 Consoles Lead GameStop Higher Today
By: Martin Blanc
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The video game industry is shifting toward a greater focus on mobile games and digital downloads. It is no surprise then that GameStop Corporation (GME), the nation’s largest video game retailer, has seen a number of challenges in expanding its underlying business. Its stock is down almost 25% so far this year, despite the launch of next-generation gaming consoles in November last year.

The latest developments show an improving trend, though. GameStop’s results for the first quarter of its fiscal 2014 (1QFY14) – announced yesterday just after the markets closed – were largely positive. It cited higher hardware sales of the Xbox One and PS4 consoles as the primary reason for the improvement in revenues. Couple this with the expected surge in mobile revenues and an improvement in profit outlook, and it becomes clear why shares of GameStop are up over 4% today as of 10:30AM EDT.

For the quarter ended May 3, GameStop’s net income rose 25% year-over-year (YoY) to $68 million. Per-share earnings (EPS) rose 28% to 59 cents, beating analysts’ expectations by two cents. Quarterly revenues increased 7% to $1.99 billion, just missing the consensus estimate of $2.02 billion.

The Grapevine, Texas-based company attributed the revenue miss to lower sales of new video game titles, which were driven down due the absence of a blockbuster game release in the quarter, and fewer titles coming on the market compared to last year. Popular gaming franchises typically release new titles in the second half of the year to take advantage of sales traction during the all-important holiday season. GameStop said its revenues from new video game titles fell 20% in the quarter to $560 million.

Nonetheless, the management was quite upbeat about the results yesterday, and said that the strong performance reflects the strength in the video game market this year. GameStop’s video game hardware sales soared 81% YoY from the same quarter last year to reach $438 million in the latest quarter. Overall, comparable store sales at GameStop locations rose 5.8%.

The launch of next-generation consoles, Microsoft Corporation’s (MSFT) Xbox One and Sony Corporation’s (SNE) PlayStation 4, led the sales growth. They also generated buzz about innovative new games such as “Destiny.” Meanwhile, a strong development pipeline for game titles has also increased the prospects of higher sales in the coming quarters.

Moreover, GameStop also noted a greater interest in Microsoft’s Xbox One console since the recent pricing cut from $499 to $399 earlier this month, which brought the price in line with that of the PS4, although the cheaper Xbox deal excludes the Kinect accessory. Going forward, GameStop expects higher sales of the Xbox, based on the initial positive response seen from the price reduction.

Another positive from the earnings release yesterday was that GameStop’s revenues from sales of older, used video game titles were up 5% in the quarter to reach $602 million, as the company used deep promotions and discounts to attract buyers.

Mobile revenues almost doubled to $102 million, as GameStop increases its focus on distributing software online as well as directly to consumers’ devices. It has recently expanded its offering for mobile products, in order to reduce its reliance on physical game titles.

The new cycle of game consoles has also fared well for video game makers such as Electronic Arts, Inc. (EA) and Activision Blizzard, Inc. (ATVI) , whose last-quarter results were strong due to higher revenues from new game titles pushed out to retailers such as GameStop.

Analysts are also expecting the video game industry to witness robust sales in the next two years, spurred by attractive upcoming game titles and a surge in mobile gaming.

The optimistic prospects are clearly reflected in GameStop’s profit outlook for the current fiscal year. The company said it expects its FY14 EPS to come in the range of $3.4-3.7. The mid-point of the range is below analysts’ estimates of an EPS of $3.67. Comparable store sales growth for the full year is estimated to be between 6-12%. GameStop expects to make revenues of $9.7-10.3 billion in FY14, the mid-point of which is higher than the Street’s estimates of revenues of $9.9 billion.

Do you agree with our take on GameStop? Let us know in the comments section below, and our analyst will reply to you shortly.

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