GameStop Is Playing Tricks on You

Things at GameStop (NYSE: GME  ) aren't always as they seem.

Let's take this morning's earnings report, for example.

  • Earnings declined, though earnings per share clocked in higher.
  • Same-store sales were negative, though net sales climbed by a still softer-than-expected 2.5%.
  • GameStop blames "lower than expected sales of new software" for the soft showing, though new video game software actually rose by 4.8%, better than GameStop's top line and even ahead of the 3.1% uptick in its higher margin pre-owned resale business.
  • The very first bullet point in GameStop's release points to a 59% surge in digital, yet it's obviously not moving the needle if new hardware, new software, and used products all posted marginally positive results and net sales only grew by 2.5%.

GameStop's guidance may be the biggest deception of all. The video game retailer is reiterating its projection of $2.82 a share to $2.92 a share in earnings for the fiscal year ending in January, though it's talking down everything else. It now sees flat to slightly negative comps, with revenue growth checking in between 2% and 3%. Just three months ago, GameStop's outlook was for a 1%-3% uptick in same-store sales and 4.5%-6.5% in top-line growth. Three months before that, it was the same profit guidance, yet GameStop was looking for 3.5%-5.5% growth in comps and 6.4%-10.2% growth in revenue.

Holy, Dorian Gray! That bottom line never ages.

A good magician never reveals his tricks, but any astute investor knows exactly what GameStop is doing. The company has been aggressively buying back its shares, thereby reducing the number of shares outstanding that its deteriorating earnings get divided into. It's the only reason why earnings would decline, but earnings per share -- and its guidance -- hold up to market expectations. The company has swallowed millions of outstanding shares over the past year, and earlier this week committed to a new $500 million buyback.

Don't get me wrong. Share repurchases are a good thing. Shareholders just need to realize that they are buying into a company that is fundamentally crumbling with every passing quarter.

GameStop is certainly trying: Its PowerUp Rewards program has 14.5 million members and its popular trade-in program makes it easy for young gamers to accept paying retail for games that Amazon.com (Nasdaq: AMZN  ) and other online retailers are typically selling for less.

It recently began selling Android tablets in some of its stores -- and accepting Apple (Nasdaq: AAPL  ) gear as trade-ins.

Technically this quarter is better than GameStop's previous quarter, where comps fell by a staggering 9.1% decline. However, what does it say when Activision Blizzard (Nasdaq: ATVI  ) scores a new initial sales record last week with Call of Duty: Modern Warfare 3 and even the typically thrifty THQ (Nasdaq: THQI  ) is bombarding television with commercials for Saints Row: The Third, yet GameStop continues to hose down its sales outlook?

That ageless bottom line sure does look pretty, but somewhere in GameStop HQ hangs a really ugly painting of its true self.

Add GameStop to My Watchlist to see how this story plays out.

The Motley Fool owns shares of Activision Blizzard, GameStop, and Apple. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Activision Blizzard. Motley Fool newsletter services have recommended writing covered calls in GameStop. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On November 17, 2011, at 5:41 PM, Varchild2008 wrote:

    *Yawn* you love hating Gamestop don't you?

    Here's a number to ponder. It's 30.

    As in 30% less NEW software product released over the Summer which was a large contributer to comps and revenue having to be revised downward this year.

    2011 was a year in which publishers dumped vast majority of their AAA titles to the last 3 months of year.

    It is difficult for any retailer to make up for 8 straight months of weakness by having a super solid last 3 months of year....yes even when Call of Duty yet again breaks a sales record.

    Plus, it sounded to me that Gamestop was being very cautious with their forecasting this time. There's still the opportunity to surprise on the upside here depending on how strong the Holiday sales are as a whole.

    The Trade-In program and the Gaming Tablet programs are in my opinion very exciting prospects for Gamestop.

    They paint a Beautful Picture of this company as this program expands internationally and hopefully provides the "Ecosystem" Gamestop wants to create on mobile devices.

    Gamestop includes a Web App on the Tablets which allows you to know which Games are compatible with the Wireless Joystick.

    That answers one of my biggest concerns I had about the tablets. No point in the joystick if I have no clue whether a game is compatible or not.

    Gamestop hasn't even bought commercials on T.V. for these tablets and they already seem like a success. Only time will tell how successful this line of business can become.

  • Report this Comment On November 17, 2011, at 5:47 PM, Varchild2008 wrote:

    Oh and a Sales Gain is a Sales Gain.

    Last I checkied, AMAZON (AMZN) bulls don't much care about Profit/Income dropping....

    At least Gamestop continues to put out Profitable Quarters while Amazon is projecting a possible LOSS in the current quarter.

    GAMESTOP had a horrid July + August + slightly weak September.....And still manages to pull out a 2.5% Sales increase?

    If that isn't impressive then I have no idea what is. Go back and read the NPD reports.

    Oh and you can not play "TRICKS" on Revenue Top-Line growth numbers.

    The "TRICKS" you are referring to are the EPS bottom line numbers.

    Earnings/Income just refers to Profit... You have to consider the extra high expenditures that Gamestop has this year with their Digital launches.

    That cuts into EPS as well....

    But ultimately....if AMAZON BULLS can say,

    "As long as there are SALES increases, I do not care about EPS or INCOME or PROFIT or ETC."

    Then why can't I???

    AMZN can produce a $200+ share price out of the SAME AIR that GAMESTOP is breathing in.

  • Report this Comment On November 17, 2011, at 5:50 PM, Varchild2008 wrote:

    "makes it easy for young gamers to accept paying retail for games that Amazon.com (Nasdaq: AMZN ) and other online retailers are typically selling for less."

    Again factually NOT TRUE.

    SKYRIM (NEW) Pre-Order Pricing on Amazon was same price as Gamestop but only at Gamestop would you get the Cloth Map.

    That equates to Gamestop having the better deal than AMAZON on pricing.

    That's just 1 example among countless many.

  • Report this Comment On November 17, 2011, at 5:53 PM, Varchild2008 wrote:

    You act like GAMESTOP is never competitive on pricing versus their competition.

    That is unebelivably irresponsible of you.

    Do you research for once and you will discover

    that GAMESTOP does BEAT Amazon, Microsoft Marketplace, and so on.

    I've been putting out counltess examples...

    Like older versions of Call of Duty at GAMESTOP being priced less than STEAM or Microsoft Marketplace.

    Countless examples....

    So a flat out "GAMESTOP's PRICES ARE ALWAYS HIGHER THAN THEIR COMPETITORS"

    is absolutely a disgraceful misleading lie.

    Please get your facts straight before trashing a stock you don't like.

  • Report this Comment On November 17, 2011, at 6:09 PM, Varchild2008 wrote:

    LOG ONTO STEAM!

    Search for: Call of Duty 4

    See the price? $19.99

    Now log onto www.Gamestop.com

    Search for Call of Duty 4

    XBOX 360 Pre-owned: $14.99.

    Go ahead.... Spend an extra $5.00 for your games if you want.

    SINS of Solar Empire: Trinity cheaper on IMPULSE than STEAM.

    AMAZON: Neverwinter Nights Diamond

    cheapest copy on Amazon I could find was some guy selling it for $13.99 USED.

    Over at GAMESTOP IMPULSE: $9.99 digital dnload.

    ????????????????????????????????????????????????????????????????????????????????

    Need I continue????

    Go ahead though pay as much as $5.00+ for your games on Amazon.

    The $13.99 price at Amazon did not include forking over an additional $3.99 shipping fee.

    There are no SHIPPING FEES at IMPULSE.

  • Report this Comment On November 17, 2011, at 6:14 PM, Varchild2008 wrote:

    The only issue with a stock like (GME) Gamestop

    is that they are in their infancy in the digital space right now.

    The only headwind I see is that they need to make it much more conveiniant for Shoppers to get what they want at a competitive price (perhaps lowest price).

    Gamestop can and always has been able to sometimes have the lowest price....or the best deal.... Even without considering the Powerup Rewards Points which can be spent on Coupons.

    They can compete on PRICE....

    The only issue is getting themselves available to the Consumers such that they do not have to leave their HOMES to get what they want.

    They continue to expand and improve this area of business.

    None of you seem to care as you continue to talk about Gamestop's EVIL *SHARE BUYBACK* program....

    Or that they should have Lit the House on Fire on earnings despite their being 30% less New Product to Sell....

    I'd much rather talk about the REVENUE growth.. The SALES growth.

    You preferred to discard the sales growth as meaningless so you can talk down the EPS.

  • Report this Comment On November 17, 2011, at 8:04 PM, Varchild2008 wrote:

    I have one more thing to say Rick...

    Your entire Article and Premise about Gamestop *TRICKING* people with its EPS meeting or beating estimates this year...

    Are you insinuating that Stock Analysts that put up these Estimates don't factor in the Sharebuy back program?

    Cause I think that would be shockingly untrue.

    I don't see why Analysts would not factor in the share buyback when they put up their EPS expectations for the next quarter and full year.

    The fact that Gamestop meets and/or beats these EPS guidances has nothing to do with the share buyback program.

    it is factored in the EPS number expectations.

    Analysts predict 39 cents a share based on Share Buy Back of an expected amount + actual earnings for the quarter.

    They factor in the negative Macroeconomics and factor in the Video Game Release Schedule and other things.

    They do not pull these EPS numbers out of their butts and then say....gee...I guess we should have thought about the Share Buyback program before saying Gamestop will earn 39 cents in Q3.

  • Report this Comment On November 17, 2011, at 8:07 PM, Varchild2008 wrote:

    Let me break it down:

    INCOME / PROFIT: down 1.5% vesus last year.

    REVENUE / SALES: UP 2.5% versus last year.

    And for that you declare Gamestop is the ugliest stock in the stock market?

    I can easily find worse Q3 earnings reports without all the much trouble with stocks carrying far greater P/E ratios.

  • Report this Comment On November 18, 2011, at 11:54 AM, itconsultant wrote:

    Rick is just a perma GME bear. Take his articles with a big pinch of salt

  • Report this Comment On November 18, 2011, at 9:04 PM, TMFBreakerRick wrote:

    Varchild, I want you to know that I respect your opinion. We just don't see eye to eye on this one. In another thread you asked to watch the "other" category, but that's the only one of the four to actually DECLINE this past quarter (in other words, it's more than just digital in there, obviously).

    You bring up the strong slate of new titles in Q4 BUT GameStop just lowered its guidance for revenue and comps (and it's not all Q3's doing). You want to believe that GME is somehow offering conservative guidance, but this is the same company that overshot guidance and had to hose down its net sales and comps for two straight quarters.

    The "trick" here is more of an illussion, with GME gobbling up shares to make the earnings number. It can't do anything about the top line so that's what keeps dropping with this and the previous revision.

    You may not like the conclusions that I'm coming to -- and if you have a long position here I would rather you make money than me be right -- but I do think I'm right about this.

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