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Is GameStop Set to Soar Higher or does Wal-Mart Stand in the Way?

Daniel Jones
May 30, 2014

Source: Wikimedia Commons

OnceĀ GameStop (NYSE: GME) reported revenue and earnings for the first quarter of its 2014 fiscal year after the market closed on May 22, shares popped up 4%. In spite of investors' fears that the company may fall victim to increased competition from retail giant Wal-Mart Stores (NYSE: WMT), GameStop's management team proved that it still has what it takes to increase earnings above what investors expect. Moving forward, does GameStop have what it takes to keep churning out strong results? Or should investors steer clear of the company's stock?

GameStop beat on earnings but fell short on sales!
For the quarter, GameStop reported revenue of $2 billion. Although this represents a 7% increase over the $1.87 billion the business reported for the same quarter last year, its top line couldn't match the $2.02 billion Mr. Market wanted to see. According to the company's earnings release, the largest contributor to its sales increase was new video game hardware sales, which rose 81% from $241.8 million to $438 million.

Another revenue driver was the 100% rise in mobile and consumer-electronics sales, which jumped from $51 million to $102.2 million as the business capitalized on its Spring Mobile and Simply Mac programs. These improvements were, however, partially offset by the company's new video game software sales, which fell 20% from $703.2 million to $602.9 million due to the launch of fewer AAA titles compared to what the company experienced in the year-ago quarter.

Source: GameStop

While GameStop fell short on sales, it managed to hand investors a positive earnings surprise. For the quarter, the business reported earnings per share of $0.59, $0.02 above what analysts forecast and an impressive 28% higher than the $0.46 management posted last year. This was due, in part, to its higher sales and a 3% reduction in share count but was mostly attributable to lower costs in the company's cost of goods sold and depreciation and amortization in relation to revenue.

But can GameStop keep turning out strong numbers as competition increases?
Over the past few years, GameStop hasn't done too much. Between 2009 and 2013, the company saw its sales fall 0.4% from $9.08 billion to $9.04 billion. This slight decrease in revenue can be chalked up to the 13% aggregate decline in comparable-store sales during this period. This was, however, mostly offset by a 3.5% rise in store count, which increased from 6,450 locations in 2009 to 6,675 locations by year-end 2013.

From an earnings perspective, the company's picture has been slightly worse. During this time frame, net income fell 6% from $377.3 million to $354.2 million as lower sales and a $28.7 million impairment charge pushed the company's bottom line down.

GME Revenue (Annual) Chart

GameStop revenue (annual) data by YCharts

Besides GameStop's spotty record, there is another reason to be worried. On March 26, Wal-Mart, the world's largest retailer, began buying back used games from customers. In an effort to grab hold of a potentially $2 billion opportunity, the company decided to buy back and refurbish games that it will then sell to other customers.

In its 2013 fiscal year, GameStop generated an impressive $2.3 billion in sales and $1.1 billion in gross profit from selling pre-owned games to its customers, making the category one of the company's largest revenue generators and its most profitable by a mile. Recognizing this as an opportunity to grow its business, Wal-Mart figured it would jump into the fray.