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GameStop’s stock was in mid-forties by Nov-2014, but dropped to mid-thirties by Jan-2015, since then by May-25-2015 the stock has crept back to $40. This blog post analyzes the factors that led to the drop in stock and the future prospects of the company. Reference - Company's latest Earning's call , Latest 10-Q / 10-K reports
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Q3-2014 There were two primary factors in Q3-2014 that impacted the company’s business. The first was Assassin's Creed moved out of the third quarter and into the fourth quarter. The second was that the AAA titles launched during the Q-3-2014 like Destiny and Super Smash Brothers faced a very tough comparison to the powerful AAA titles in Q3-2013 including GTA V, Pokémon X/Y, Battlefield 4 and Assassin's Creed IV: Black Flag. Consolidated sales for Q-3-2014 were $2.09 billion, down 0.7% from the prior year quarter, with a comp decrease of 2.3%. Consolidated net earnings for the third quarter excluding divestiture costs related to Spain were $64.3 million, decrease of 6.3% from last year. Because of the above mentioned factors, the company revised its full year 2014 earnings per share guidance of $3.40 to $3.70 to a new range of $3.40 to $3.55, excluding divestiture cost. The market reacted strongly on this news causing a 25% drop in stock price. The company had a lot of positives in Q3-2014. Software market share on Xbox One and PS4 hit an all-time high at 56% for the quarter. They introduced their Power Up Rewards private-label credit card to all Power Up Reward customers in Q3-2014. This card is a third-party program with alliance data systems and provides qualified rewards customers up to $2,000 in credit to be spent at GameStop stores along with special financing offers through the end of 2014. Mobile transactions increased by 79% and 69% of their online traffic came from a mobile phone or tablet. They released a major upgrade to the GameStop mobile app and with over 6.1 million installs, this app made it easier to research products, find local stores, track pre-orders and manage their Power Up Rewards account and game library. Q4-2014 AND FULL YEAR RESULTS: They delivered all-time high market share of 28% on hardware and 46% on software. All the investment in Power Up rewards the unique content. Execution and customer service paid off with this generation. Non-GAAP digital receipts climbed 31% year-over-year. They delivered this year $948 million of digital revenues. Technology brands had a spectacular year. They expect that business to contribute over $1.4 billion in sales and $170 million in operating earnings by 2019. Their partnership with AT&T is particularly productive. After only 2 years, they are their second largest and fastest growing dealer and they have done multiple acquisitions in the past year. Sales decreased 5.6% in the fourth quarter, but increased 2.8% for the year. Excluding FX, sales decreased 2.8% in the fourth quarter and increased 4.3% for the year. Comparable store sales declined 1.8% for the quarter, but increased 3.4% for the year. Gross margins expanded 50 basis points for the year resulting in a 29.9% margin rate, which is their highest annual gross margin rate and the highest gross profit dollars they have achieved in their history. Operating earnings increased 7.7% for the quarter and increased 7.8% for the year. Non-GAAP net income increased 5.9% for the quarter and 10.2% for the year. Non-GAAP EPS increased 13.2% for the quarter despite a $0.05 negative impact from FX rates and increased 15.3% for the year despite $0.08 negative impact from FX. DIGITAL GROWTH STRATEGY: Future growth in the electronic game industry will be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming. The proliferation of online game play through Microsoft Xbox Live, the PlayStation Network and PC gaming websites has led to consumer demand for subscription, time and points cards (“digital currency”) as well as DLC, for existing console video games. To respond to this demand, they currently sell various types of products that relate to the digital category, including Xbox Live, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and online timecards and DLC. Gamestop is the only significant brick-and-mortar retail seller of DLC and that they are frequently the leading seller of DLC for most major game titles. Additionally, they operate Kongregate, which is a leading platform for web and mobile gaming that has attracted over 3.3 billion web gameplays and over 600 million mobile gameplays since its launch. Kongregate is also a publisher of mobile games and has several titles available in both the Apple and Google app stores, which have received over 36 million mobile installs. While all Kongregate games are free to play, the website features a proprietary virtual currency called "Kreds" that can be used to unlock upgrades and features, and mobile games may also include items available for purchase. The company intends to continue investing in the expansion of Kongregate's mobile game publishing platform through the development of new games designed to appeal to core gamers across the Kongregate and GameStop networks. WORLD’S LARGEST PRE-OWNED GAMES STORE : They are the largest retailer of pre-owned video games in the world. They provide their customers with an opportunity to trade in their pre-owned video game products in their stores in exchange for store credits which can be applied towards the purchase of other products, primarily new merchandise. They have the largest selection (approximately 3,000 SKUs) of pre-owned and value video game titles which have an average price of $23 as compared to an average price of $45 for new video game titles and which generate significantly higher gross margins than new video game products. Their trade-in program provides their customers with a unique value proposition which is generally unavailable at mass merchants, toy stores and consumer electronics retailers. From time to time they have purchased value-priced, or closeout, video game products from publishers, distributors or other retailers and they can resell these products for gross margins that are more similar to pre-owned video game products than margins on new software. They also operate refurbishment centers in the U.S., Canada, Australia and Europe, where defective video game products can be tested, repaired, relabeled, repackaged and redistributed back to their stores. GAME INFORMER : They publish Game Informer, the world’s largest print and digital video game publication and website featuring reviews of new title releases, game tips and news regarding current developments in the electronic game industry. Print and digital versions of the monthly magazine are sold through subscriptions, digitally and through displays in their stores throughout most of the world. Game Informer magazine is the fourth largest consumer publication in the U.S. and for its December 2014 issue, the magazine had approximately 7 million paid subscribers, including over 2.7 million paid digital magazine subscribers. The digital version of the magazine is the largest subscription digital magazine in the world. Game Informer is a part of the PowerUp Rewards Pro loyalty program as a key feature of each paid PowerUp Rewards membership. The company also operates the website www.gameinformer.com, which is the premier destination for moment-by-moment news, features and reviews related to video gaming. In 2014, the website averaged over 2.9 million monthly unique visitors. Game Informer revenues are also generated through the sale of advertising space in Game Informer magazine and on www.gameinformer.com. CONCLUSION: Company had posted some weak results in Q3-2014 because of which it had to revise its 2014 yearly projections and thus the stock declined sharply in Nov-2014. Q4-2014 results were OK and the company has made steady progress in increasing its intrinsic value (as noted above). Thus I think the stock has good chances of getting to its fair value of $50/share. |
