GameStop beats Q1 earnings estimates, turns bullish

Video game retailer GameStop Corp. (GME) reported better than expected earnings for the first-quarter of fiscal 2016. The revenue met the analysts’ estimates. However, due to weak second quarter outlook, the shares of GameStop fell 3.94% to close at $28.80 on Friday. The earnings report, on the other hand, reflected some vital positives about the company. When the market begins to ponder the earnings report in detail, as explained below, there is a high probability of seeing a rise in the share price.

The Dallas, Texas-based company reported a decline in revenue to $1.971 billion, from $2.06 billion in the similar period last year. The first-quarter revenue was in line with the estimate of analysts.

GameStop operates in two main categories – video game software, and pre-owned and value games. These two categories, which contribute 58% of the total revenue of the company, continue to face a decline in the sales. From the perspective of analysts, the worrisome case is the 6.2% decline in the same store sales in the first-quarter. In spite of that, the consumer electronics retailer managed to post earnings, which exceeded analysts’ estimates.

During the first-quarter, the company recorded GAAP income of $65.8 million or $0.63 per share, compared to $73.8 million or $0.68 per share in the year-ago similar period. The non-GAAP income for the first-quarter declined to $68.4 million or $0.66 per share, from $73.8 million or $0.68 per share in the similar period of fiscal 2015. The non-GAAP earnings comfortably went past the analysts’ estimate of $0.61 per share.

By slowly making a transition to the mobile and digital content business, the company is adapting itself to the new age trend. This is evident from the fact that in the past one year, the company closed 125 video game stores, but opened 523 stores in the technology segment. The growth of the technology segment almost offsets the sales decline in its core business.

IGN

The digital revenue increased 16.6% to $259 million. Similarly, revenue from the sales of mobile phones and consumer electronic goods increased 41%. Thanks to the acquisition of ThinkGeek, the sales of collectible rose 250% in the first-quarter. Digital content currently contributes 17% of the total revenue of the company, while the mobile and consumer electronics contribute 10% to the total revenue.

The company anticipates a 4% to 7% decline in the second-quarter same store sales with earnings in the range of $0.23 to $0.30 per share. However, GameStop reiterated its fiscal 2016 earnings outlook range of $3.90 to $4.05 per share. With a share price of about $28, the forward PE ratio works out to about 7. The company also offers an attractive dividend yield of 5%. Thus, it is quite clear that the shares are now available at a bargain. So, we can expect the share price to remain range bound with bullish bias during the second-quarter.

The chart indicates a strong support for the stock at 28 levels. In fact, last Friday, the stock failed in its attempt to break the support. Technically, the crossover of the MACD’s main line above the signal line also indicates increasing bullishness in the scrip.

Thus, it is wise to purchase a one touch call option contract having an expiry date in the last week of June. A strike price of $33 or lower would be a safe bet under this scenario.