GameStop Corp (NYSE:GME) shares were up slightly this morning after the company reported first-quarter earnings late Thursday that met earnings expectations but missed Wall Street sales estimates.
Analysts at Wedbush maintained an Outperform rating and a US$19 price target on the games and electronics retailer but adjusted estimates to reflect lower Tech Brands sales and stubbornly high operating expenses.
"We are adjusting our estimates to reflect lower Tech Brands sales and stubbornly high operating expenses, along with updated release timing. We now expect EPS of US$0.16 for Q2 (from $0.13), US$0.69 for Q3 (from US$0.57), and US$2.00 for Q4 (from $2.29). The primary driver of the EPS changes is the timing of game launches in October vs. November, and our assessment that holiday sales will increasingly shift to full game downloads and away from physical purchases at GameStop," wrote Wedbush analysts Michael Pachter, Nick McKay and Matthew Breda in a note to clients.
The changing landscape in the gaming industry, with companies focusing more on digital sales compared to hardware sales, has negatively impacted the company’s performance.
“We expect comps to continue to decline modestly going forward. Full game downloads are capturing increasing share of game sales, at a rate of around 300 basis points per year. Fortunately, GameStop’s buy-sell-trade value proposition has great appeal to many gamers who value the trade-in potential of a physical game,” wrote the analysts.
GameStop reported first-quarter earnings of US$0.38 per share on revenue of US$1.9bn. The consensus earnings estimate was US$0.35 per share on revenue of US$2bn. Revenue fell 5.5% compared to the same quarter a year ago.
“GameStop shares remain difficult to value given the company’s continuing declines in its core business and its lack of progress in growing its Tech Brands business,” pointed out the Wedbush note.
The analysts noted that the company’s Tech Brands segment made an “exceptionally poor profit contribution” of only US$11.2mln primarily due to store closings and stubbornly high operating expenses.
“With modestly declining earnings ($3.34 last year and an estimated $3.20 this year and $3.14 next year), GameStop clearly deserves to trade at a compressed multiple. Our price target of US$19 values GameStop shares at a 6x forward multiple, well below its retail peers,” wrote the Wedbush analysts.
“Given the large upside appreciation potential, we are maintaining our Outperform rating on GameStop shares,” they added.
The company on Thursday reiterated its prior 2018 guidance for adjusted earnings of US$3 to US$4.35 a share.
Also late Thursday, the Grapevine, Texas, company said that Shane Kim would step in as interim chief executive.
“We have known Mr Kim for more than 15 years, and admire and respect his knowledge of the business and his management skills,” wrote the analysts.
“We are comfortable that he will be an effective leader during the transition, and we expect the search to take some time, as the company may hire from outside its employee base,” they added.
The analysts said they expected the company to “use tax savings and lower new venture spending to increase its share repurchases.”