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GameStop Corp. Earnings: What to Expect Thursday

By Dan Caplinger - Mar 25, 2014 at 10:00AM

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Despite hopes for the holiday quarter, the video game retailer's business has looked dire lately. What can GameStop do to recover?

GameStop ( GME -2.34% ) will release its quarterly report on Thursday, and investors have been skeptical about the video game retailer's ability to sustain its growth and profits in an increasingly difficult industry environment. Despite new video game consoles from Sony and Microsoft ( MSFT 0.01% ), GameStop has had to overcome competition from fellow electronics retailer Best Buy ( BBY 0.23% ) while also dealing with the trend toward video game producers like Activision Blizzard (NASDAQ: ATVI) seeking ways to distribute their products directly to players without going through retail intermediaries.

For years, GameStop's business model worked like a charm, as gamers were willing to sell their used games at relatively low prices and buy other used games at a relatively high markup. Yet as the video game industry has evolved, GameStop has had to work hard to preserve its niche in the business, and despite its best efforts, it hasn't been entirely successful in stemming the tides working against it. Let's take an early look at what's been happening with GameStop over the past quarter and what we're likely to see in its report.

Stats on GameStop

Analyst EPS Estimate

$1.93

Change From Year-Ago EPS

(10.6%)

Revenue Estimate

$3.79 billion

Change From Year-Ago Revenue

6.3%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will GameStop earnings be able to grow?
In recent months, analysts have cut their estimates on GameStop earnings, reducing January-quarter estimates by more than $0.20 per share and slashing more than 6% off their full-year fiscal 2015 projections. The stock has dropped more than 20% since mid-December.

A big part of that drop came when GameStop announced preliminary figures for the holiday season back in January. The first nine weeks of the quarter were ugly, as positive same-store sales of 7.1% domestically and 17.4% internationally came almost entirely from Sony and Microsoft's new consoles. By contrast, sales of new software dropped by 22.5%, and because of the much wider margins on software than on hardware, GameStop had to cut its expected earnings range by $0.12 to $0.19 per share.

One big threat to GameStop has come from other players in the video game industry. In January, Sony said that it would offer its PlayStation Now video game streaming service, using the power of cloud computing to offer games directly to players. By offering a distribution channel to Activision Blizzard and other video game makers, Sony hopes that players will be willing to forgo actually owning games, instead paying subscriptions to use them on demand. Although Microsoft pulled back on aspects of its Xbox One that would have been even more restrictive, the trend in the industry is working against GameStop on this score.

Yet on the retail front, GameStop is also finding that the barriers to entry in its business are low. Best Buy has challenged GameStop on used video games for a while, but now Wal-Mart recently entered the fray with its own plans to buy and sell pre-owned games. With the ability to take store credit for use on a much wider variety of goods, gamers might be more interested in what Wal-Mart offers them for their unwanted video games than GameStop's more limited selection, forcing GameStop to offer higher value to stay competitive.

The big question GameStop faces is whether enough customers will avoid jumping to the PlayStation 4 and Xbox One, instead taking the opportunity to stock up on much-cheaper offerings for their respective predecessor consoles. If they do, then GameStop will have at least one final product cycle with which to reap the rewards of high-margin software sales for the Xbox 360 and PlayStation 3. Otherwise, though, GameStop could have serious trouble ahead.

In the GameStop earnings report, watch to see how the company expects to hold off new retail challenges while also addressing the threat of digital distribution. Only with a solid, forward-looking strategy can GameStop hope to survive in the video game industry in the long run.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$334.97 (0.01%) $0.05
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$106.93 (0.23%) $0.25
GameStop Corp. Stock Quote
GameStop Corp.
GME
$173.65 (-2.34%) $-4.16

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