GameStop Corp. (NYSE:GME) stock has witnessed a sharp decline of 19.7% year to date, underperforming the industry’s whopping gain of 31.8%. Meanwhile, stocks such as Best Buy Co., Inc. (NYSE:BBY) , Conn's, Inc. (NASDAQ:CONN) and Systemax Inc. (NYSE:SYX) which belong to the same industry have surged 37.4%, 74.3% and 185.5%, respectively. So after observing the performance of its peers, the first question which comes to our mind is why GameStop is lagging behind and how much time will it take to match the industry’s performance? Let’s delve deeper and find out what’s ailing the stock.
What’s Hurting the Stock?
Stiff competition, aggressive promotional strategies and waning store traffic are the headwinds with which the retail sector is grappling, and GameStop is not immune to it. We note that the bottom line continues to decline year over year. Earnings per share had declined 2.9%, 12.9%, 9.3% and 0.8% in the first, second, third and fourth quarters of fiscal 2016. In the first and second quarter of fiscal 2017, it declined 4.5% and 44.4%, respectively. The reflection of the same is visible in the stock’s dismal run.
The bottom line which has been witnessing a downtrend in the past quarters will continue to decline in fiscal 2017 too. Management continues to anticipate earnings for fiscal 2017 in the range of $3.10-$3.40 per share, compared with fiscal 2016 earnings of $3.77 per share. Moreover, GameStop expects comps in fiscal 2017 to be at the higher end of earlier provided guidance of flat to down 5%.
GameStop’s basic concern is the weakness prevailing in new software sales, which is heightening apprehensions about the impact of digital downloads on the same. New software sales witnessed 3.4% decline in second-quarter fiscal 2017. During fourth-quarter fiscal 2016 conference call, the company stated that it expects new software sales to decline mid-single digits in fiscal 2017.
Technology Brands & Collectibles Business Looks Robust
Though the stock has underperformed the industry in the recent times, the stock can bounce back in the near future. Both Technology Brands & Collectibles Business are growing at a very rapid pace and can help the company regain its lost position.
Technology Brands, which has been witnessing robust growth in the past, impressed investors in the second quarter too. In the reported quarter, Technology Brands sales gained 7%, following an increase of 21.5% in the previous quarter, driven by year-over-year growth in AT&T (NYSE:T) authorized retail stores. Management anticipates sturdy performance of Technology Brands and Collectibles to continue in fiscal 2017, and added that new hardware innovation in the video game category also looks promising.
Management also anticipates Technology Brands’ operating earnings to rise over 30% to $120 million during fiscal 2017 and to be $200 million in fiscal 2019. During fourth-quarter fiscal 2016 conference call, the company stated that it expects Technology Brands sales to increase 10-16% in fiscal 2017.
GameStop’s foray in to the collectibles and licensed merchandising category, and Technology Brands has been profitable. During the fiscal second quarter, the collectibles business sales surged 36.1% to $122.5 million buoyed by robust sales of Pokémon and Marvel-related products. The company added five Collectibles stores during the quarter, taking the total count to 99 stores. GameStop expects to enhance collectibles business to approximately $650-$700 million during fiscal 2017 and anticipates becoming a $1 billion business by the end of fiscal 2019. In the third quarter, Collectibles sales are forecasted to increase by 30-40%.
GameStop currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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