GameStop Slips After Earnings Miss Despite Assurances For ‘Better’ Second Half

Shares of GameStop (GME) plunged after the video game retailer reported second quarter results, with adjusted earnings for the quarter falling short of consensus estimates. The company also noted a decline in U.S. comparable store sales in the quarter as well as a dip in new software sales and pre-owned sales.

WHAT’S NEW: After the market close yesterday, GameStop reported Q2 adjusted EPS of 15c on revenue of $1.69B, compared to analysts’ forecasts of 16c and $1.64B, respectively. Comparable store sales grew 1.9% in Q2, with U.S. SSS falling 1.4% and international SSS growing 9.8%. New hardware sales in Q2 grew 14.8%, led by continued demand for the Nintendo Switch (NTDOY), though new software sales and pre-owned sales fell 3.4% and 7.5%, respectively, impacted by lagging Xbox One (MSFT) sales. The company also said that digital sales grew 28.1% and collectibles sales increased 36.1% in the quarter. Looking ahead, GameStop reaffirmed its fiscal 2017 EPS guidance of $3.10-$3.40 and sees FY17 SSS to be at the high end of its previously stated guidance range of (5%)-0%. Analysts expect the company to report FY17 EPS of $3.31.

CEO BULLISH ON BACK HALF: On the company’s earnings call, GameStop chief executive officer Paul Raines said that he sees “better” results for the retailer in the second half of the year, driven by continued Switch demand and the launch of the Xbox One X. In an interview on CNBC today, Raines said that the strength of the Nintendo Switch shows there’s still a place for console gaming and added that there’s “tremendous demand” for future Switch products.

STREET RESEARCH: Following the quarterly report, SunTrust analyst David Magee maintained a Buy rating on GameStop and said he would “downplay” the importance of the EPS miss, noting that various categories performed “roughly as expected.” The analyst added that Q2 is the retailer’s weakest quarter from a seasonal perspective and that the company should have a “strong” second half. In addition, Baird analyst Colin Sebastian backed his Outperform rating and $21 price target on GameStop, saying that Q2 results were in line with his expectations, though gross margins came in a bit light. Sebastian said that the stock should benefit from seasonal category strength, and the ongoing hardware ramp from the Switch and Xbox One X, improving pre-owned and tech brand trends. Wedbush analyst Michael Pachter also kept an Outperform rating on the stock, noting that the retailer has the highest market share of Switch hardware and software in the U.S. and in most of its international markets. On the other hand, Pachter said that the technology brands business underperformed relative to his expectations yet again, and that the uncertainty over how successful the Xbox One X launch will be as well as a “tepid” debut for the PS4 Pro (SNE) could put pressure on physical software sales later this year, which have generally disappointed in recent years due to the growth of digital spending.