Is Gamestop a Buy Ahead of the Holiday Season?

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With the summer more or less behind us, it's time to look ahead to see what the rest of the year may bring. The holiday season is a crucial one for many retailers, and for some, this is when most of the year's profits stream in.

GameStop (NYSE: GME  )  is a company that tends to do more business toward the end of the year, and with two new consoles set for launch in November, it looks like the company may be looking forward to an excellent fourth quarter.

For those who may not be familiar with the company, GameStop is one of the world's largest video game retailers. It has more than 6,500 locations worldwide, and a market cap of $6.1 billion. The company sells new and used video games as well as hardware and accessories. The stock is up a massive 134% in the last year, and offers a 2.1% dividend yield.

Growing, somehow
While many predicted the fall of retailers like GameStop due to the rise of e-commerce and digital piracy, this has so far not come to pass. In fact, the company seems to be holding its own pretty well. Quarterly earnings per share, while not stellar, have beaten analyst expectations for five consecutive quarters.

Recently, game sales have been picking up. According to an NDP Group report, video sales climbed 23% in August for the first monthly increase since 2011. Total video game revenue for the four-week period rose 1% to $521 million. Reportedly, releases such as 'Madden 25' and 'Saints Row IV' contributed to the industry's strong performance. GameStop shares reacted favorably to the news.

While the company's first and second-quarter EPS dipped a bit compared to the previous year, earnings seem to be holding up pretty well with full-year EPS expected to grow by $0.02. The company tends to make most of its money in the fourth quarter, around the holiday season, with Q4 contributing nearly 70% of full-year EPS. The launch of two much-hyped consoles in November should boost the company's bottom line this year.

New consoles
First up is Sony's (NYSE: SNE  ) new PS 4, scheduled for release in mid-November. It is expected to cost around $399 in the US, making it a full $100 cheaper than the new Xbox. According to Sony, the console will be "the most powerful gaming device ever conceived." While this statement sets the bar pretty high, the PS 4 does indeed look like it will be a beast, sporting 8 gigs of GDDR5 memory as well as eight x86-64 AMD Jaguar CPU cores.

A weak yen is expected to boost sales in the company's gaming segment, but its latest outlook warned of lower operating results for the fiscal year ending Mar. 31.

The other contender is Microsoft's (NASDAQ: MSFT  ) Xbox One, set for release around the end of November. As mentioned above, it will be about $100 more expensive than the PS 4, while offering specs similar to the PS 4. Microsoft initially caught a lot of heat for certain decisions surrounding the resale of used games, but has since reverted to a model more similar to Sony's. While currently still holding the No. 1 spot in terms of console sales, the PS 4 seems the console to beat this holiday season.

GameStop recently increased its full-year earnings forecast in anticipation of these releases, on the back of a healthy quarterly beat. Additionally, the company is expected to benefit from high-profile game releases including 'Battlefield 4' and 'Grand Theft Auto V.' With pre-orders for the PS 4 streaming in, the company is now expecting full-year EPS of $3.00-$3.20 versus a previous $2.90-$3.15. In a cautious consumer-spending environment, the strong report and raised outlook were received as excellent news.

The bottom line
All is not lost for GameStop, as became clear in its most recent earnings report. New console offerings from Microsoft and Sony are furthermore expected to boost sales, especially in the all-important fourth quarter, and the company recently upped its full-year guidance. As such, the company looks like a solid pick going into the holiday season. 

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  • Report this Comment On September 19, 2013, at 10:16 AM, AtotheK99 wrote:

    I think things look even better for GME than this article indicates. Not only are there 2 new game platforms, but this is the first full holiday season for the Nintendo Wii U and both Nintendo and Sony updates their handheld systems recently. The Nintendo DS is the best selling gaming platform of all time, beating Sony and Microsoft.

    The way I look at it is this holiday, there are 5 new systems and slew of great games. GME should pop nicely heading into 2014.

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