GameStop (GME): FY Guide Should Be Largely Unchanged After Pre-Announcement - Wedbush

Wedbush analyst, Michael Pachter, reiterated his Outperform rating on shares of GameStop (NYSE: GME) ahead of earnings next Tuesday but believes shares will continue to trade at a compressed earnings multiple until it can successfully reverse the decline in its core video game business. He believes that once stability has returned and the company has begun to deliver on the earnings growth promised by its new initiatives, shares could appreciate above the current roughly 6x P/E multiple, potentially to 7 – 8x.

Just over two weeks ago, GameStop reduced Q3 guidance for same-store sales to down 7.0 – 6.0% from down 2.0% to up 1.0% and for EPS to $0.45 – 0.49 from $0.53 – 0.58. Consensus was $1.99 billion and $0.47. GameStop attributed SW weakness to the October releases, without specifying which were to blame. High-profile releases included EA’s Battlefield 1 and Titanfall 2, Microsoft’s Gears of War 4, and Take-Two’s Mafia III, with the two EA games launching late in Q3.

First month physical sales for the four games missed the analyst's estimates. The pace of the sales mix shift to digital from physical is increasing, with full game downloads accounting for up to 35 – 45% of first week sales for core releases. A slew of new SW and HW (including Xbox One S, PlayStation VR, and PS4 Pro) likely caused some hesitation among gamers about how to allocate holiday spending. Q3 NPD data suggests industry SW sales were down 10%, with HW down 19% and the combined figure down 14%.

No change to the price target of $30.

For an analyst ratings summary and ratings history on GameStop click here. For more ratings news on GameStop click here.

Shares of GameStop closed at $23.46 yesterday.

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