Shares of GameStop (NYSE: GME) opened nicely higher this morning, after the video game retailer washed away a disappointing holiday quarter with a cheery outlook.
There are a few reasons for GameStop bulls to be cautious in running their victory laps, but let's dive into the numbers first.
Total sales inched 1% higher, to $3.52 billion as a result of heady expansion. Comps actually took a 7.9% hit, matching the negative unit-level performance that the chain posted for the entire fiscal year. Earnings for the seasonally potent quarter fell to $1.29 a share, from an adjusted $1.34 a share showing a year ago.
The good news is that 2010 should be a winner, according to the company. Comps will be marginally positive, with strength in software offsetting a decline on the hardware side. Total sales will soar 4% to 6%, aided by the opening of 400 new stores. Finally, earnings per share will clock in at a record $2.58 to $2.68 – a 14% to 18% gain.
If it plays out this way, today's euphoria will be more than justified. I'm just skeptical because I've been following GameStop closely since Barnes & Noble (NYSE: BKS) spun it off about six years ago.
This is the same company that called bottom in May, August, and November and was wrong every single time.
Allow me to be a little more blunt. Let's compare GameStop's upbeat guidance a year ago with its eventual performance.
|
Metric |
3/26/09 Guidance |
Reality |
|---|---|---|
|
Sales Growth |
10%-12% |
3.1% |
|
Comps |
4%-6% |
(7.9%) |
|
EPS Growth |
18%-22% |
(5.3%) |
How confident are you in GameStop's flawed visibility now?
To be fair, I should also be cynical about my own cynicism. The past year has been brutal for the industry itself. GameStop's model has also been challenged. Amazon.com (Nasdaq: AMZN), Toys "R" Us, and Best Buy (NYSE: BBY) went on to test buyback models, threatening GameStop's high-margin used game resale business. Wal-Mart (NYSE: WMT) and Amazon also were aggressive discounters on the video game front this holiday season. In other words, it's hard to imagine things deteriorating this year the way they did last year. The company is also cranking out its outlook from what is hopefully a more humbled perspective.
GameStop's healthy hoard of cash gives it some flexibility to meet its metrics. It can expand quickly to grow the top line. It can also eat its own stock to pad the bottom line. The retailer announced a $300 million share buyback two months ago -- and meant it. It has now repurchased $247 million worth of stock.
This doesn't mean that I am ditching my bear suit. I still think that console-powered digital marketplaces, social gaming, and smartphone apps will make GameStop less relevant with every passing year. I'll concede that there's a tempting valuation argument to be made in favor of GameStop at current prices, but this morning's pop has the stock back to where it was three months ago -- when naïve analysts figured that GameStop would be earning $2.92 a share this new fiscal year.
If someone has a case for GameStop mattering more a year or two from now, I'm all ears in the comment box below. If not, be careful as you tiptoe through this morning's euphoria.
