GameStop (NYSE:GME) is scheduled to announce earnings results after the market closes on Thursday, March 26. Wall Street expects a mixed showing for the video game retailer's holiday quarter: Sales are expected to have shrunk by 2% while earnings jumped 14% above the prior-year period.
|Metric||2013 Q4||2014 Q4*|
|Revenue||$3.68 billion||$3.62 billion (-2%)|
|Profit||$1.90 per share||$2.16 per share (14%)|
Higher video game sales
That projected sales dip is really a hangover from 2013's unusually strong hardware sales. Remember that GameStop dominated the market for next-generation video game devices. Microsoft and Sony managed extremely popular launches for their Xbox One and PlayStation 4 devices, and that powered an 8% comparable-store sales gain for GameStop in the fourth quarter of 2013.
The retailer won't benefit from a hardware craze in this year's comparable period. But GameStop should enjoy a strong bounce in software sales now that the consoles are in millions of homes. In fact, game sales tied the Xbox One and PS4 were up 94% this holiday season, according to GameStop's holiday earnings update. Two of the biggest hits were Activision Blizzard's Call of Duty: Advanced Warfare and Take-Two Interactive's Grand Theft Auto V.
The rising software tide should help GameStop in two ways. First, it will add more inventory to the used video game market, which drives its profitable sales model. Pre-owned software carries the biggest profit margin of anything that GameStop sells: 47%, compared to 23% for new video games. As the next-gen console market matures, the company benefits from a deeper catalog of those used titles to sell to gamers.
Second, GameStop's profitability should spike due to the fact that it is selling fewer consoles. New hardware carries the lowest profit margin of any GameStop's product, around 10%. That's why operating margin dove at the end of 2013 from 11.6% to 9.5%. New hardware doubled as a percentage of sales to over 31%, dragging GameStop's overall profitability down.
The outlook for 2015
Investors can expect that trend to swing back in GameStop's favor in the upcoming report. The fourth-quarter profit rise should cap a year in which earnings climb to as high as $3.55 per share, 18% above 2013's result.
This year could get off to a strong start thanks to Electronic Arts' (NASDAQ:EA) Battlefield Hardline launch. That game is expected to help GameStop post a 5% revenue gain for 2015. But the pros think earnings will improve at a faster rate; Wall Street pegs annual profit at $4.07 per share.
We'll find out on Thursday whether those estimates differ significantly from management's initial forecast for 2015 results. We could see a big swing in the stock price if they do.