GameStop Needs a Hit
May 17th 2013 6:08PM
Updated May 17th 2013 7:05PM
Will Gamestop ever stop shrinking?
The struggling video game retailer has clocked lower quarterly sales for two years running. And when it reports earnings next Thursday, it seems set to extend that depressing streak. Let's take a closer look at what investors can expect from GameStop next week, and in the year ahead.
A really low bar
No one is holding out much hope for the company's start to 2013. Wall Street analysts peg GameStop's earnings at just $0.40 a share. That's down from the $0.56 a share they were calling for two months ago. And it's well below last year's $0.54 haul.
The company is even less optimistic. GameStop told investors back in March that the first half of 2013 would be "challenging," and it forecast a comparable sales drop of between 6% and 8% and EPS of about $0.40 a share.
If there's a positive earnings surprise in store, it will probably be fueled by a lower-than-expected share count, rather than higher-than-expected earnings. After all, GameStop has been buying back tons of its own stock, and its earnings forecast didn't account for any additional purchases this past quarter.
New growth avenues
But investors will be looking for actual earnings improvement, not just more cash thrown their way in the form of increasing dividends and more share repurchases.
GameStop's best bet for growth this quarter is in its "other" sales category. That division includes its mobile business, digital downloads, and toys, and it was worth a cool $1.5 billion last year. The company books solid earnings from these sales, too. The profit margin on them was 40% last quarter, or about double what GameStop earns from its new video game business.
And there are a few big catalysts that Gamestop can look forward to this year. In August Disney releases Infinity, the company's answer to Activision Blizzard's Skylanders franchise.
The battle between these two companies promises to be fierce. So brutal, in fact, that Activision just warned investors that its results could be materially hurt by the skirmish. But the good news for Gamestop is that -- whoever wins the fight -- it promises to boost sales at the retail register.
After that, the video game season gets kicked into high gear early, with Take-Two Interactive's highly anticipated new Grand Theft Auto release in September. That should drive a whole different set of gamers to stores, generating some excitement as we head into the next-generation console releases for the holidays.
Foolish bottom line
Altogether, Gamestop will probably sing a tune that shareholders recognize well from the last few years: This quarter was rough, but we returned tons of cash to you all, and there is a light at the end of the tunnel. But with shares up 90% over the last year, the real question is whether that will continue to be good enough for investors.
While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.
The article GameStop Needs a Hit originally appeared on Fool.com.Fool contributor Demitrios Kalogeropoulos owns shares of Walt Disney and Activision Blizzard. The Motley Fool recommends Activision Blizzard, Take-Two Interactive, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, GameStop, Microsoft, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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