Please ensure Javascript is enabled for purposes of website accessibility

GameStop Needs a New Game to Play

By Rick Munarriz - Mar 27, 2016 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The video game retailer posts its third straight unflattering report, but it will keep playing for a long time.

You have to be brave if you're going to own shares of GameStop (GME -3.96%) ahead of the video game retailer posting quarterly results. It happened in August, when the stock tumbled 8% the day after posting uninspiring results for the fiscal second quarter. It happened three months later when the stock opened 16% lower after a rough fiscal third quarter.

This brings us to late last week when GameStop announced results for its fiscal fourth quarter after Thursday's market close. It was easy to fear the worst. The trend hasn't been kind for physical software in this age of digital delivery, and hardware products carry the crummiest margins. It also had to be a bad omen for GameStop to schedule its earnings release and subsequent conference call when the market wouldn't be open on Friday, knowing that it would be nearly 90 hours before the next trading session. 

The report proved to be as problematic as one would expect. The holiday quarter itself wasn't horrendous. Gains in mobile, collectibles, and consumer electronics -- and a slight uptick in hardware -- helped more than offset a 10% drop in new software sales and flat sales in its high-margin pre-owned software business. 

Earnings growth was flattish, but grew on a per-share basis as a result of GameStop's voracious appetite for share buybacks. Between the repurchases and its beefy 4.9% yield, the one positive thing that you can say about GameStop is that it's "all in" when it comes to returning money to its stakeholders. 

However, GameStop's guidance is worrisome. It's having a brutal current quarter, and it now sees year-over-year sales growth taking a 4% to 7% hit, held back by negative comps that are expected to slide by 7% to 9%. It's now holding out for a profit between $60.5 million to $66 million, well shy of the $73.8 million that it rang up a year earlier. Analysts were holding out for a flat showing.

It has a rosier outlook for the entire fiscal year, targeting slightly positive sales growth between 0% and 3% with comps checking in between flat and negative 3%. It sees $407 million to $423 million in net income, in line with the adjusted profit of $415.6 million that it just served up in fiscal 2015. The market is still, naturally, going to place more of an emphasis on the near-term guidance, especially given GameStop's tendency to tweak its outlook with every passing quarter. 

GameStop's saving grace through all of this is that there are worse things than flat results, especially for a lean model given its historically high margins and the low overhead that comes with its small-box retail setting. This could be why at least two analysts -- W.R. Baird and BB&T Capital Markets -- rushed in to reiterate their bullish ratings following the report.

The model may be breaking, but it's far from broken. Investors may want to think twice about owning GameStop ahead of what has now been three straight problematic quarterly reports -- we'll find out how bad the market thinks the report actually is come Monday -- but it's still making enough dough and diversification-oriented acquisitions to keep playing for a long time. The rules of the game are changing, but it still has enough ammo to keep hitting the "continue" button until it finds a new game that it can win. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has the following options: short July 2016 $28 puts on 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$40.52 (-3.96%) $-1.67

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.