Facebook
Twitter
Video game retailer GameStop (NYSE: GME) has had to fight off perceptions that as more gaming is done on mobile devices, it will do away with traditional video games. The company has done an excellent job of proving that old-fashioned gaming consoles are still in demand. Its second-quarter financial results helped solidify investors’ confidence.
GameStop’s earnings handily beat expectations and the stock rose nearly 2% in after-market trading on Thursday. However, shares fell 8% on Friday following an analyst downgrade by Benchmark Co.
Still, this has been a good year for GameStop, as shares are up 28% since the beginning of 2015.
New Gaming Consoles Lead the Way
GameStop once again capitalized on strong console sales, and its lucrative trade-in program.
GameStop reported $1.76 billion of quarterly revenue, up 1.8% year over year. Same-store sales, which measures sales at locations open at least one year, grew 8.1%. This helped earnings rise 9%.
Adjusted EPS reached $0.31 per share, which was well ahead of the $0.24 per share expected by analysts.
Once again, GameStop’s growth was fueled by the new video game consoles, the Xbox One from Microsoft (NASDAQ: MSFT) and the PlayStation 4 by Sony (NYSE: SNE). In constant currency, new hardware sales rose 3.7% last quarter.
Also more favorable for GameStop was that pre-owned activity accelerated last quarter. In constant currency, pre-owned sales increased 5.1% last quarter, as the PlayStation 4 and Xbox One became a greater share of the pre-owned market.
Pre-owned sales are vital for GameStop, as the business carries very high profit margins. Now that the newest iterations of the PlayStation and Xbox are in circulation, consumers are trading in for products for these newer consoles, which carry higher values for GameStop.
This really boosted sales and margins in the United States. Comparable sales in the U.S. rose 10.8% last quarter. And, GameStop’s total gross profit margin expanded by 110 basis points year over year, to 32.9%.
GameStop expects positive trends to continue, and the company raised its full-year forecast. Earnings are expected to come in at $3.66 to $3.86, up from prior expectations of $3.63 to $3.83. Same-store sales are expected to grow 2% to 7% for the full year.
A Red Flag?
The one concern investors may have with GameStop is that the company will face very tough comparisons next fiscal year. The Xbox One and PlayStation 4 have been on store shelves for almost two full years. It will not be long before any consumer who wanted one of the consoles purchases it. After that, the console will become saturated.
GameStop will likely continue to benefit from the new console tailwind for the remainder of the current fiscal year, but next year is a different question. At that point, the company will endure a headwind in the form of difficult comparisons.
It will be crucial for video game developers to release hit new titles, to keep the Xbox One’s and PlayStation’s momentum going in the right direction.
Cash Returns to Shareholders
Still, as GameStop rings up higher profits from the newest video game consoles, it’s returning a lot of that cash to shareholders through buybacks and dividends. GameStop utilized $107 million to repurchase 2.6 million shares. But it still has $340 million remaining on its current stock buyback authorization.
In addition, GameStop pays a solid 3% dividend. Over the past three years, the company has more than doubled its dividend.
Collect Dividend Income Every Month!
We’ve put together a simple calendar that pulls together all the market’s best dividends into a single, easy-to-read document. One look, and you’ll be able to set up a 12-month dividend stream for regular income every month.