GameStop Has a Lot to Prove on Thursday

By Rick Munarriz Markets Fool.com

Diehard gamers aren't flocking toGameStop (NYSE: GME)the way that they used to, but the initial success ofNintendo's (NASDAQOTH: NTDOY) hard-to-find Switch console, plus a slate of hot games, could help keep investors from bailing on its stock. GameStop will provide the market with fresh financials on Thursday afternoon, and it's not likely to be a strong report.

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Analysts expect to see global sales slipping 1.6% to $1.94 billion. If Wall Street's on target, it will be GameStop's fifth quarter in a row with declining year-over-year sales. Sales from new stores aren't expected to be enough to truly offset another period of declining comps.

GameStop used to be able to rely on aggressive share buybacks to mask its bottom-line weakness on a per-share basis, but that's no longer possible. Analysts forecast a profit of $0.51 a share, well below the $0.66 a share it delivered a year earlier. This should be GameStop's third quarter in a row with declining earnings per share.

Image source: GameStop.

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GameStop is in a funk.The chain, with 7,500 stores across more than 14 countries, saw its sales peak in fiscal 2011. Things haven't been a colossal flop since then, though. In fiscal 2016, GameStop's top line only clocked in 10% lower than it did five years prior, but that is mostly because the retailer has expanded into new markets including smartphones, collectibles, and digital products.

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Still, Thursday's report isn't likely to be as ugly as GameStop's last one. The stock tumbled 16% two months ago after the company posted disappointing fiscal fourth-quarter results. The holidays were disastrous for GameStop, featuring a 20.8% plunge in comps at its stateside locations. New hardware sales plummeted 29%, and new software sales saw a 19% decline. Even digital receipts and high-margin pre-owned sales -- two categories that had been resilient for GameStop in the past -- clocked in with single-digit declines.

The carnage won't be as bad this time around because of the arrival of Nintendo Switch during the quarter. Hardware is typically a low-margin segment of GameStop's business, but scarcity of the new console let GameStop jack up the value it derived from the units it did receive by offering them in premium-priced bundles with higher-margin software and accessories. The results should also look comparatively better as its sister concepts specializing in mobile, computing, and collectibles become a larger piece of the revenue mix.

GameStop won't have to live up to its earlier quarterly guidance for a change. Earlier this year, the small-box retailer suspended the practice of making quarterly outlook forecasts. GameStop did offer guidance for the entire year -- calling for essentially flat total sales on $3.10 to $3.40 in earnings per share in fiscal 2017 -- in March, and it will naturally be a stock mover if it adjusts those targets on Thursday.

GameStop stock is trading closer to its 52-week low than its high, and the languishing stock price has pushed the investment's beefy dividend yield to 6.6%. Thursday's report isn't likely to woo growth investors back into the shares, but any signs of stabilization on the bottom line would provide welcome comfort to income chasers. GameStop's playing a new game now.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short July 2017 $24 calls on GameStop. The Motley Fool has a disclosure policy.