Welcome to the Stock of the Day.
Shares of GameStop (GME) sold off nearly 2% after Wal-Mart (WMT) announced plans to buy used video games from customers starting next week.
The used video games business is GameStop’s bread and butter, so how will this challenge affect the specialty retailer going forward?
Find out today.
With nearly 6,500 locations across 15 countries, GameStop is known for being the largest video game and entertainment software retailer in the world. The company was founded in 1984 as Babbage’s, a small software retailer, but within ten years grew into a leading player in the videogame retail industry.
In the last decade, the company has aggressively bought out the competition, including EB Games, Rhino Video Games and Spawn Labs. In FY 2013, the company brought in $8.89 billion in sales and $2.65 billion in gross profit—nearly half of which came from the sale of used video games.
Wal-Mart Stores announced today that it will allow customers to trade in video games for credit to use at its namesake stores as well as Sam’s Club locations. This applies to games for Xbox, PlayStation and Nintendo consoles. Wal-Mart will refurbish these used video games and resell them, similarly to how GameStop does.
This is part of a larger push towards the used-merchandise business; Wal-Mart recently entered the market through refurbished television sets, smartphones and more. GameStop previously had a near monopoly on the used video game business but this may be challenged by Wal-Mart because the latter will offer more trade-in options.
GameStop is slated to release quarterly results next Thursday, March 27. The analyst community is calling for 6.3% annual sales growth and nearly a 11% year-on-year drop in profits.
If the fourth quarter results pan out as expected, GameStop will record 3% top-line growth and a 4% bottom-line decline for FY 2014.
However, looking ahead to next quarter and beyond, the estimates improve. For FY 2015 GameStop is headed towards 7.6% sales growth and 24.3% earnings growth. The Wal-Mart announcement may throw a wrench in things so if you currently hold GME shares I’d keep a close eye on analyst earnings estimates.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. GME (which is ranked as moderately aggressive in Portfolio Grader), has improved over the past 12 months in my screening tool. This time last year, GME was a C-rated hold.
Since then, the specialty retailer has improved in terms of institutional buying pressure (B-rated Quantitative Grade) and financial health (B-rated Fundamental Grade). Out of the eight fundamental metrics I graded it on, GameStop scored well on four: Sales growth, earnings momentum, cash flow and return on equity.
Meanwhile, GameStop could stand to improve operating margin growth, earnings growth, earnings surprises and analyst earnings revisions.
Bottom Line: As of this posting I consider GME an B-rated (cautious) Buy. The stock currently boasts a solid fundamental rating but this could change depending on how well Wal-Mart is able to launch this new business.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!