Video game and entertainment software retailer GameStop Corp. (GME) on Thursday reported a 12% increase in profit for the third quarter, helped by sales growth of new video game software and used video game products. Looking ahead, GameStop said that the holiday season has started strong and reiterated its earnings outlook for the fourth quarter. The company also tightened its earnings forecast range for the full year.
Q3 Results
The Grapevine, Texas-based company's net income for the third quarter increased to $52.23 million or $0.31 per share from $46.67 million or $0.28 per share in the year-ago quarter.
The results for the latest quarter include $2.5 million of debt retirement costs, or $1.6 million net of tax benefits. The year-ago quarter's results include merger-related costs of $16.6 million, or $10.5 million net of tax benefits.
On average, sixteen analysts polled by Thomson Reuters expected the company to report earnings of $0.30 per share for the quarter. Analysts' estimates typically exclude special items.
In early November, GameStop reiterated its outlook for third-quarter earnings to range between $0.27 and $0.33 per share, excluding debt retirement costs of $0.01 per share. Total sales for the third quarter increased 8.2% to $1.83 billion from $1.70 billion in the year-ago period, and beat analysts' consensus revenue estimate of $1.73 billion for the quarter.
Despite gaining over 150 basis points in new video game market share during the quarter, GameStop's comparable store sales fell 7.8%, primarily due to a decline in new video game hardware sales. The company had earlier projected comparable store sales for the quarter to decline in the range of 11.0%-6.0%.
Daniel DeMatteo, Chief Executive Officer of GameStop, said, "A sharp focus on efficient operations in this challenging global economy delivered solid earnings results and significant market share gains. Gross margins expanded, led by a sequential 150 basis point improvement in the used category. Store foot traffic increased from the prior quarter, driven by strong new title releases and price cuts on all current generation platforms."
Segmental Review
Sales of new video game hardware for the third quarter decreased 2.1% to $321.4 million from $328.4 million a year ago. However, sales of new video game software grew 9.4% to $769.4 million from $703.3 million last year, and sales of used video game products climbed 19.4% to $507.7 million from $425.1 million in the previous-year quarter. Other sales declined to $236.2 million from $238.9 million in the prior-year quarter.
During the quarter, new video game software accounted for 41.9% of the company's total sales, while new video game hardware accounted for 17.5%, used video game products accounted for 27.7% and other sales accounted for 12.9% of total sales.
The company's top five selling games during the quarter were Electronic Arts' "Madden NFL 10", Microsoft's "Halo 3: ODST", Warner Home Video Games' "Batman: Arkham Asylum", 2K Sports' "NBA 2K10" and Nintendo's "Wii Sports Resort".
Other Metrics
GameStop's gross profit for the quarter rose to $523.08 million from $473.43 million a year ago, while gross margin increased to 28.5% from 27.9% in the prior-year period. Operating earnings increased to $90.27 million from $85.34 million in the same period last year.
Year-To-Date Results
For the nine-month period, GameStop's net income declined to $161.34 million or $0.96 per share from $165.96 million or $0.99 per share a year ago.
However, sales for the period rose to $5.55 billion from $5.31 billion in the same period last year. Outlook
Looking ahead, GameStop said that the holiday season has started strong. The company noted that in the first 72 hours of the release of "Call of Duty: Modern Warfare 2", it sold over 2.5 million copies of the game worldwide. GameStop is optimistic that the success of the game would serve as a bellwether for what it can expect for the remainder of its holiday game sales.
"We know consumers are looking for value in these difficult economic times. Our stores are prepared to deliver this holiday with the broadest selection of new and used games, the most knowledgeable gaming associates and the buy-sell-trade model, which offers affordable choices that meet the needs of all types of gaming customers," DeMatteo said.
For the fourth quarter of fiscal 2009, GameStop reaffirmed its earnings outlook range of $1.47- $1.65 per share, citing strong initial results of the new software titles released earlier in November, such as "Call of Duty: Modern Warfare 2" from Activision, "New Super Mario Bros." from Nintendo and Ubisoft's "Assassin's Creed 2". The outlook compares to the company's reported earnings of $1.39 in the prior-year period. Analysts expect the company to report earnings of $1.57 per share for the quarter.
The company also maintained its outlook for comparable store sales for the fourth quarter to range between negative 7.0% to negative 1.0%.
For fiscal year 2009, GameStop now forecasts earnings per share in a range of $2.45-$2.63, compared to the prior range of $2.40-$2.64 per share. The revised outlook represents annual earnings per share growth of 2%-10%. Analysts expect the company to report earnings of $2.53 per share for the year.
Comparable store sales for the year are now projected to range between negative 7.0% and negative 4.0%. Earlier, the company had forecast comparable store sales to range between negative 8.0% and negative 4.0%.
The company noted that the guidance does not include debt retirement costs or merger-related expenses.
Other Developments
In late October, GameStop announced plans to hire about 15,000 seasonal part-time game advisers in order to manage the upcoming holiday rush. The company noted that the launches of several highly anticipated blockbuster video games combined with the recent price reductions for the PlayStation 3, Xbox 360 and Wii gaming consoles are expected to create a lot of store traffic.
Stock Quotes
GME, which has been trading between $16.91 and $32.82 in the past 52 weeks, is currently trading at $24.29, up $0.20 or 0.83% on a volume of 1.06 million shares.
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