On March 27, GameStop (NYSE:GME) will report financial results for the fourth quarter of its 2013 fiscal year. Heading into earnings, shareholders are cautiously optimistic, as evidenced by the stock's 53% premium to its 52-week low. In spite of this positive sign, is it likely that this quarter may be the last great quarter the company has before dying? Or is the specialty retailer about to get a lot prettier?
Mr. Market has mixed expectations
For the quarter, analysts expect GameStop to report revenue of approximately $3.8 billion. If this forecast turns out to be correct, it will represent a 6.5% increase compared to the $3.6 billion in sales the company reported in the year-ago quarter. This sales increase would mirror third-quarter results.
GameStop's revenue rose 19% in the third quarter year over year, driven by a 20% rise in comparable-store sales; new releases like Pokemon X&Y and Grand Theft Auto V helped prop up the top line. Some spillover from these titles can be expected to help the retailer this quarter.
In terms of revenue, GameStop's picture looks appealing, but profitability may take a hit. For the quarter, analysts expect the company to report earnings per share of $1.93. This will be 11% lower than the $2.17 management reported in the fourth quarter of 2012 and will probably be due to a change in the company's product mix.
With the release of PlayStation 4 and Xbox One, as well as new video game sales resulting from these systems, the Foolish investor should consider a shift in the company's sales mix to be a foregone conclusion. These new products will help the top line but will hurt the bottom line because of the lower margins they provide.
|New Hardware||New Software||Pre-Owned|
|GameStop's Gross Margins||7.5%||22%||44.5%|
For instance, in last year's third quarter, GameStop's gross profit margins from new video game hardware and software came in at 7.5% and 22%, respectively. While these numbers aren't terrible, they are a fraction of the 44.5% gross profit margin earned by the company's pre-owned video game products.
Will this be the last quarter before GameStop declines?
Irrespective of how well GameStop performs for the quarter, there is a chance that its profitability and sales will decline significantly moving forward. In a press release, retail behemoth Wal-Mart Stores (NYSE:WMT) announced plans to begin buying back and selling used games beginning March 26. Recognizing that margins in the used video game market are high compared to the 25% gross margin Wal-Mart averages on its products, the company said it could grab up to $2 billion in sales from the move.
Let's say the market for pre-owned video games is already at or near full market saturation and that Wal-Mart can use its buyer and supplier power to offer better terms than GameStop. In this scenario, the retailer's jump into the market could take a huge chunk out of GameStop's $2.4 billion in sales from the products.
This would serve to lower both revenue and profitability at GameStop, which has faced challenges in both areas over the past couple of years.
Based on the data provided, it's clear that analysts are expecting a mediocre quarter from GameStop. Whether or not this proves to be accurate has yet to be seen. But even if the company reports a blowout quarter, there's serious concern over its ability to compete with Wal-Mart.
For this reason alone, the Foolish investor should be very cautious about an investment in the specialty retailer. But this does not mean that it's a terrible investment. In the months to come, investors will see how well GameStop can stand up to the competition. If its efforts aren't effective, it might be time to consider getting out while the getting's good.
Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. 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.