GameStop Gains as Q3 Earnings Beat Outweighs Gloomy Holiday Outlook

Shares of GameStop (GME) gained 7.82% to $25.99 in midday trading on Wednesday after the video game retailer reported third-quarter earnings that topped analysts' estimates late yesterday.

Investors bid the stock higher even though the Grapevine, TX-based company also said it sees a larger-than-expected decline in comparable-store sales during the holiday quarter.

GameStop projects that comparable-store sales will fall between 7% and 12% during the fourth quarter, while Wall Street is forecasting a drop of 6.7%. Earnings per share are expected to range between $2.23 and $2.38 for the current quarter vs. analysts' estimates of $2.34 per share.

GameStop reaffirmed its full-year earnings per share guidance of $3.65 to $3.80 and comparable-store sales slumping between 6.5% and 9.5%. Analysts surveyed by FactSet are modeling earnings of $3.72 per share and comparable-store sales falling 7.2% in fiscal 2016.

"While the video game business has underperformed recently, we are focused on maintaining our leading market position, especially during the holiday season, as well as driving diversification through the growth of technology brands, digital and collectibles," CEO Paul Raines said in a statement.

The company, which operates almost 6,000 retail stores in the United States and overseas, has struggled as more consumers are downloading games rather than purchasing physical copies.

GameStop expects a challenging year-end for the traditional physical video game industry, Wedbush Securities said in an analyst note. New hardware and software sales are expected to tumble by about 15% to 20% during the fourth quarter.

"Management commentary reflected weaker-than-expected sell-through that we believe has been caused by strong competition for wallet share from a slew of new hardware devices and high-profile software releases, coupled with an increased willingness to wait for discounting," the firm said this morning. But Wedbush noted that Black Friday sales should help to jump-start spending.

For the 2016 third quarter, GameStop reported earnings of 49 cents per share, topping the FactSet consensus estimate of 47 cents per share. Revenue decreased 2.8% to $1.96 billion year-over-year and fell short of analysts' projections of $1.99 billion.

Comparable-store sales slid 6.5% during the most recent period. The figure was bigger than the 5.6% drop expected by Wall Street, but in line with the company's preliminary estimates.

Earlier this month, GameStop said it expected comparable-store sales to decline between 6% and 7% and projected third-quarter earnings per share between 45 cents and 49 cents on revenue of about $2 billion.

The video games category was affected by weaker-than-expected demand during the last few weeks of October, the company said. New hardware sales tumbled 20.6%, while new software sales dropped by 8.6%.

More than 5.64 million of the company's shares traded so far today vs. its average 30-day volume of 2.89 million shares.

(GameStop stock is held in the Dividend Stock Advisor portfolio. See all of the holdings with a free trial.)

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