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Can GameStop Keep Going After Last Week's 10% Pop?

By Rick Munarriz – Nov 27, 2016 at 11:20AM

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The small-box video game retailer moves higher after posting encouraging quarterly results. The gamer haven had recently posted disappointing preliminary financials.

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GameStop (GME -0.73%) shareholders were playing to win last week. The stock moved 10.1% higher after the video-game retailer posted financial results for its fiscal third quarter. They were in line with the bleak prognosis offered up earlier in the month, but there was some comfort in knowing that GameStop is making some serious headway in moving away from its video-game business.

Net sales declined 2.8% from the prior year to hit $1.959 billion. Same-store sales at its namesake stores plunged 6.5%. Hardware sales took a 20.6% hit, and understandably so as existing console platforms have been slow with material next-gen upgrades. New software sales dipped 8.6%, as gamers continue to embrace digital delivery over store-bought titles. Pre-owned sales -- GameStop's highest-margin business and a steady source of revenue as gamers trade in older games and gear -- also slipped, falling 6.4% from last year.

Nothing seems to be going right for GameStop's model, but at least the lean operating model with light staffing requirements and affordable strip-mall rent is keeping it profitable. Reported earnings declined just 9% to $50.8 million, or $0.49 a share. 

However, with GameStop making headway in diversifying its business across mobile stores and more recently its ThinkGeek acquisition, it's able to point to potential turnaround catalysts. Collectibles and GameStop's technology brands took big steps during the quarter, even though it wasn't enough to get GameStop's fundamentals pointing in the right direction.

Playing the game to win

GameStop was originally expecting to post a profit of as much as $0.58 a share on comps ranging between a 2% decline and a 1% gain. Earlier this month, the stock took a hit after the company warned that it wasn't going to meet those goals. The new guidance for its fiscal third quarter called for net sales of roughly $2 billion, with a 6% to 7% slide in comps. GameStop's profit target was lowered to a range between $0.45 and $0.49 per share.

Last week's reality was mixed. Net sales fell short. Comps landed smack-dab in the middle. Earnings per share landed at the high end of the range, assisted in part by healthy share buybacks, as its share count has gone from a peak of 164.7 million during the third quarter of fiscal year 2009 to just 104 million now, according to S&P Global Market Intelligence data. 

Last week's rally would've probably been greeted with less bullish enthusiasm if the company hadn't taken a hit when it hosed down its outlook earlier in the month. That news sent the shares to a four-year low. However, the encouraging growth outside its core namesake stores came as a relief to nervous investors last week. Earlier this year, GameStop's recipe for a turnaround at its small-box stores stemmed from everything from a push to virtual reality to the success of Pokemon Go. None of of those catalysts appear to be materializing in a needle-moving way, so now it will be up to ThinkGeek, 

We'll have to see if ThinkGeek, Spring Mobile, Cricket, and Spring Mac drive retail-level growth as the company hopes to continue to gain a head of steam with digital delivery. The future is still hazy for GameStop, but after hitting a multi-year low earlier this month, it warranted a bounce on the prospect that a second act is possible for GameStop.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has the following options: short January 2017 $28 puts on GameStop. 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.

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