Game Over For GameStop?

Wedbush Securities, a leading investment firm, had the following comments on GME:

GameStop shares are likely to be valued at a compressed multiple until it delivers on the growth promised by its new initiatives. Should it continue to grow earnings and reinvest excess cash through repurchases, we expect its P/E multiple to remain at around 7 — 8x while its EPS grows to around $5.00 per share, suggesting meaningful share price appreciation.

We expect Q1 EPS at or above the high-end of guidance from recent market outperformance, Technology Brands, and repurchases. Our Q1 estimates are for revenue of $1,991 million, comps of down 7.0%, and EPS of $0.64, vs. consensus of $1,970 million and $0.61, and guidance of $1,916 — 1,978 million, comps of down 9.0 — 7.0%, and EPS of $0.58 — 0.63. NPD data suggests industry SW sales were down 6% in Q1, with HW down 21% and overall HW/SW down 13%. GameStop’s comps figure has outperformed the domestic industry by roughly 600 bps or more in each of the past five quarters, giving us confidence that it can hit the high-end of comps guidance. Repurchases should lift EPS to the high-end of the guidance range at a minimum, with $245.3 million in remaining repurchase authorization. GameStop delivered $0.15 of Q4 EPS upside despite a $0.09 F/X drag. The company did not pre-announce at its mid-April Investor Day.

We expect FY:16 guidance to remain largely unchanged given that E3 is upcoming and results are back-end loaded. FY:16 guidance is for implied sales of $9.36 — 9.64 billion (flat to up 3.0%), comps of down 3.0% to flat, and EPS of $3.90 — 4.05. Guidance factors little or no contribution from VR, a highlight of E3. Also, it excludes future repurchases. PlayStation VR should launch in October, and hardware upgrades from Microsoft (NASDAQ:MSFT) and/or Sony should lift guidance in 2H.

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We believe the key takeaway from the Investor Day was that management expects 3 — 5% compound annual EPS growth over the next four years, without considering ongoing share repurchases. This level of EPS growth contemplates a range of $4.39 — 4.74 by FY:19 with no share repurchases, and a range of $4.82 — 5.21 if modest share repurchase assumptions are factored in.

Maintaining our OUTPERFORM rating and 12-month price target of $36.

GameStop Corp., incorporated on April 13, 2005, is an omnichannel video game retailer. The Company sells video game hardware, physical and digital video game software, video game accessories, as well as mobile and consumer electronics products and other merchandise through its GameStop, EB Games and Micromania stores. The Company operates its business in four Video Game Brands segments: United States, Canada, Australia and Europe, and Technology Brands segment. Each of the Video Game Brands segments consists primarily of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories, which it refers to as video game products, new and pre-owned mobile devices and related accessories. Its Video Game Brands stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, prepaid subscription cards and digitally downloadable software, and also sell certain mobile and consumer electronics products and collectible products. Its Technology Brands segment includes its Spring Mobile and Simply Mac businesses.

Written By: Warrior Trading