GameStop Q3 FY18 Preview: Expect New Video Game Software Sales To Drive Earnings

GameStop Inc. (NYSE:GME) is scheduled to post its Q3 FY18 results on November 29. We expect the company to post a low single digit decline in the top line, as growth in New Video Game Software, and Digital, Technology Brands, Collectibles & Others will be more than offset by a decline in New Video Game Hardware, and Pre-Owned & Value Video Game Products, in our view. However, we forecast strong earnings growth in the near term. The changing landscape in the gaming industry, with companies focusing more on digital sales compared to hardware sales, has negatively impacted GameStop’s performance, and this trend will likely continue in the near term.

The company’s stock price has rallied 20% over the last week, following the news on Spring Mobile. GameStop has entered into a definitive agreement to sell its Spring Mobile business, which owns and operates over 1,200 AT&T wireless stores, to Prime Communications, for $700 million. We have created an interactive dashboard analysis ~ What Is The Q3 FY18 Outlook For GameStop ~ on the company’s expected performance in Q3 FY18. You can adjust the revenue and margin drivers to see the impact on the company’s earnings. Below we discuss our expectations and forecasts for the company.

Expect Digital, Technology Brands, Collectibles & Other Revenues To Trend Higher While Pre-Owned & Value Video Game Products To See Mid-Single Digit Decline

We estimate GameStop’s New Video Games Hardware sales to decline in double digits to around $250 million in Q3 FY18. This can be attributed to Nintendo Switch console, which was launched last year and drove segment sales for GameStop in the prior year quarter. In fact, the overall industry hardware sales were up a solid 28% (y-o-y) in 2017, benefiting from launch of new consoles. Looking at the Pre-Owned & Value Video Game Products, we forecast mid-single digit decline in the quarter, as there is not much of pre-owned inventory for the Nintendo Switch console, which is in demand of late. 

However, we forecast mid-single digit growth in the company’s New Video Game Software sales as well as Digital, Technology Brands, Collectibles & Other revenues. The New Video Games Software segment will likely benefit from several launches in the quarter, including, Call of Duty and Battlefield among others. Digital, Technology Brands, Collectibles & Other segment will likely benefit from higher demand for video game accessories and collectibles. In fact, accessories and collectibles revenue were up 20% in the first half of fiscal 2018. However, pricing issues have weighed on the gross margins in the recent quarters, and it will be interesting to see if the company can improve its margins in Q3.

Looking at technology brands, the company’s decision to sell its Spring Mobile business appears to be a step in the right direction. The segment hasn’t been performing the way the company expected while acquiring it back in 2013. The company plans to use the proceeds from the sale to reduce its debt, and focus on its video game and collectibles business. We will be closely watching for any updates on this in the company’s earnings conference call.

We currently forecast GameStop’s earnings of $1.05 per share in Q3 FY18, and have a $15 price estimate for GameStop, which is slightly above the current market price.