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.
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.