Analyst Predicts GameStop’s Q4 Condition

Financial analyst Edward S. Williams of BMO Capital Markets issued a report previewing GameStop's fourth quarter results, which will be released on Thursday, March 27, followed by a conference call with investors at 11:00 a.m. EDT. Williams predicts that the video games retailer will report strong hardware sales from the launches of the PS4 and Xbox One for Q4, but weaker software sales during this transitional console period. He also said that severe winter weather, which hit most of the United States in January, may have affected January sales—as well as April quarter sales.

"We forecast revenue of $3.799 billion and EPS of $1.96 versus consensus revenue and EPS estimates of $3.787 billion and $1.93, respectively," Williams wrote in his research note. "We expect gross margins to decline approximately 300 basis points y/y to 24.4%, driven by a revenue mix shift toward hardware sales and declines in legacy software. We estimate operating margin to be 9.5% versus 11.6% a year ago. That said, we believe the company’s results this quarter are not indicative of its future performance in the short term, given the shift to next-generation platforms. As with prior years, we expect the seasonally high quarter ending January to represent roughly 40% of annual sales and more than 60% of full-year EPS."

Williams went on to say that strong hardware sales will help for the early stages of the "next platform cycle," but weaker performance for legacy software will create a "short-term headwind that pressures gross margins and near-term earnings."

He also noted that GameStop faces headwinds from the "growing ease" with which content on the new systems can be digitally distributed.

The firm currently rates GameStop as "Market Perform."

You can check out the BMO Capital Markets report here (PDF).

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