Lower Pre-Owned Video Game Products Sales Will Likely Weigh On GameStop’s Near Term Earnings

GameStop Inc (NYSE:GME) recently posted its Q3 FY 2018 results, which were below the street estimates. The company incurred a $587.5 million asset impairment charge primarily related to goodwill in Q3. It also lowered its fiscal 2018 guidance, which led to a sell off in the share price, following the earnings release. Looking forward, we forecast a mid-single digit decline in the company’s overall revenues for the full year, primarily led by lower pre-owned video game products sales. Separately, the company’s decision to sell its Spring Mobile business will help it focus on the core video game business, and also reduce its debt. We have created an interactive dashboard analysis ~ What Is The Near Term Outlook For GameStop ~ that shows the company’s expected performance in fiscal 2018 and 2019. You can adjust the revenue drivers to see the impact on our earnings and price estimate.

Expect New Video Game Hardware And New Video Game Software Revenues To Decline In Mid-High Single Digits In Fiscal 2018

We forecast new video game hardware as well as software sales to decline in mid-high single digits in fiscal 2018, and in low single digits in fiscal 2019. New consoles, such as Nintendo Switch, launched in 2017, spurred video games hardware sales for GameStop. The sales have cooled in 2018, thereby impacting the company’s new video game hardware revenues. Also, lower hardware sales have impacted the new video game software sales. Fewer title releases when compared to 2017 have also impacted the sales. Having said that, software sales could trend higher in Q4, due to several new game launches, including Call of Duty and Battlefield, among others.

Pre-Owned Video Games Segment Will Likely Decline In Low Teens While Digital Products, Retail & Others Could See Moderate Growth

We forecast GameStop’s pre-owned video game products’ revenue to decline in low teens in fiscal 2018. This can be attributed to the absence of any major new titles being released in the recent quarters. Also, there is not much of pre-owned inventory for the Nintendo Switch console, which itself is in high demand. We expect the segment to face revenue declines even in the long run. With the launch of new consoles, demand for older consoles will fade out eventually, given the change in technology, hardware, and newer games. 

Looking at digital products, retail & others, we forecast low single digit revenue growth in the near term, primarily led by higher accessories and collectibles sales, which are seeing strong demand of late. However, collectibles gross margins have declined in the recent quarters, amid lower pricing, and changes in the product mix. This will likely put the pressure on the overall segment margins, which we forecast to decline in the near term. Also, with Spring Mobile business being sold, the overall segment revenues will see some decline in fiscal 2019, post the transaction being closed. Note that the interactive dashboard and the Trefis model for GameStop currently does not reflect the impact of the  Spring Mobile business sale.

Overall, we expect the company’s revenues to decline to roughly $8.65 billion, and we forecast the company’s earnings of $2.90 per share in fiscal 2018, which is slightly above the higher end of the company’s guidance. Our price estimate of $17 for GameStop is roughly 20% above the current market price.