GameStop shares take a hit despite higher earnings

Shares of GameStop skidded Friday after the video game and consumer electronics retailer reported strong second-quarter results but gave a forecast that disappointed Wall Street.

The Grapevine-based company said sales of downloadable content for Batman: Arkham Knight and Witcher 3 powered its results, and its adjusted profit and revenue beat Wall Street estimates.

But its forecasts for the current quarter were generally lower than analysts expected, and GameStop said it thinks sales of new software will fall from last year, when Activision Blizzard’s game Destiny was launched.

Analysts said the company is being “conservative,” but shares of GameStop (ticker: GME) closed down $3.71, or 8 percent, at $42.49.

The company said its net income in the third quarter will be 53 to 60 cents per share, and it expects revenue of $1.73 billion to $1.8 billion. It said sales at stores open at least a year should rise 1 to 4 percent.

Analysts expected earnings of 59 cents per share and revenue of $2.16 billion, according to FactSet, and they had forecast same-store-sales growth of 4.5 percent.

Analyst Evan Wilson of Pacific Crest Securities wrote that the company’s hardware and software sales were disappointing but that accessories and other products countered that weakness. He, too, said GameStop will likely beat the targets it set.

“GameStop seems to be taking the Street’s desire for more conservative estimates to heart,” he wrote. “With a strong console cycle, release slate and growth across the business, we see high potential for upside in the second half of the year.”

Second-quarter sales and profit gains were driven by increases in its newer mobile and consumer electronics sectors, reflecting strong growth at its Spring Mobile AT&T stores.

On a conference call with analysts, CEO Paul Raines said the company had “a great quarter,” noting that earnings-per-share growth topped Wall Street estimates.

He said the company’s ability to diversify its business has been proven right. “Taking a moment to step back and look at the business, you have to recognize that we have a knack for identifying and developing opportunities in transformational technology and business acquisitions that are paying off for shareholders,” he said.

Wedbush analyst Michael Pachter said that the video game industry is doing better this year and that the schedule for new games is “loaded” in the second half of the year. He wrote that the company should surpass its estimates for the third quarter and the full year, saying GameStop is also gaining market share.

But Michael Hickey, an analyst with Benchmark, downgraded the stock from “hold” to “sell,” saying the company’s traditional business will be “increasingly displaced” by the shift to digital games over the next five years.

“We remain largely unimpressed by the company’s transformation to a mobile distributor/t-shirt, bento box, waffle maker retailer and suspect the physical distribution of game software is terminal obsolescent,” Benchmark said in its report.

This story was originally published August 28, 2015 at 10:22 AM with the headline "GameStop shares take a hit despite higher earnings."