GameStop Reveals Surging Profits, Forecasts Strong GrowthGameStop Reveals Surging Profits, Forecasts Strong Growth

Predominant U.S. video game specialty retailer GameStop has released its quarterly results, with sales surging 38.2% to $2.3 billion, citing World Of Warcraft and console software as its main high points. The company, which operates 4,778 retail stores across the United States and in fourteen countries worldwide, revealed that its overall profits were $129.8 million for the 14-week fourth quarter of 2006 ending February 2nd 2007, compared to $85.0 million for the 13-week quarter the previous year. On a comparable store basis, sales increased 26.5% during the fourth quarter, and the company explained: "Brisk sales in January of Vivendi's World Of Warcraft and new video game software titles drove the greater than anticipated results." Most impressively, GameStop's overall sales were $5,318.9 million for fiscal 2006, an increase of 72.0% over fiscal 2005 sales of $3,091.8 million. On a comparable store basis, sales increased 11.9% during the fiscal year. Looking forward, the company predicted sales growth of between 19.0% and 21.0% for the period ending February 2008, with comparable store sales ranging from +14.0% to +16.0%, "...backed by a strong release slate of video game titles across all platforms." GameStop expects to open between 500-550 stores worldwide in 2007. Specifically for the first quarter of fiscal 2007, the company expects comparable store sales to range from +12.0% to +14.0%, driven by the expected launches of Sony's PlayStation 3 in Europe and Australia, Sony's God Of War 2 for the PlayStation 2 in the U.S., and the worldwide launch of Nintendo's Pokemon Diamond and Pearl for the Nintendo DS, as well as continued strong demand for Microsoft Xbox 360 titles. Based on expected strong video game industry fundamentals, the company's expanding worldwide retail portfolio, and sound cash generation, GameStop currently expects earnings per share to grow at least 25% annually in fiscals 2008 and 2009. R. Richard Fontaine, GameStop's Chairman and Chief Executive Officer, commented on his thoughts for the future in an official statement from the company: "While we are in the very early stages of another strong growth cycle, it is not a mirror of the past. In fact, our 2007 guidance is based on our belief that this cycle will be deeper, wider, and longer than any previous period of new console introductions." He continued: "From the technology powerhouses of Xbox 360 and PS3, to the uniquely engaging ease of play and inventiveness of the Wii, to the portability of the DS Lite, to the value of the PS2, there is a product and a price range to stimulate the core and casual gamer, and attract new customers to the video game experience." [UPDATE: 3:00PM] In his latest note to investors, Lazard Capital Markets' Colin Sebastian notes that GameStop is due for a very positive 2007, with its sales growth 'nicely ahead' of Lazard's estimates (which previously predicted a rise to $2.12 billion), and has raised its 2007 sales estimates to $6.33 billion from its original $6.05 billion. Said Sebastian, "While there are still risks associated with the console transitions and sluggish PS3 and Xbox 360 hardware sales, we believe that overall positive industry trends are likely to continue through at least 2008. GameStop should benefit from multiple tailwinds, including the ramping installed base of new consoles, increasing handheld product sales (DS and PSP), growing used business, and a more robust software release schedule." In his own notes, Wedbush Morgan's Michael Pachter added, "As we have said for several quarters, we continue to believe that GameStop is a 2007 – 2008 story. Given relatively light launches for the Nintendo Wii and the Sony PS3, we believe that there is significant upside to company guidance for FY:07, particularly as we expect U.S. sales of 4.5 million PS3s and 7 million Wiis during the year," compared to last year's 1 million and 1.5 million respectively. "While we believe that GameStop will inevitably lose hardware market share, particularly as the new consoles are made widely available at mass merchants," said Pachter, "we expect the company to sell a significantly higher number of consoles in FY:07 than it did in FY:06." Pachter also added that GameStop's software sales growth at 20 percent should slightly outpace the industry forecast of 18 percent, adding, "GameStop is a destination for 'new stuff', and new software represents an evergreen opportunity to sell 'new stuff'." Most interestingly, while Pachter admitted that GameStop has no direct competitors in the U.S., he sees international expansion as a 'virtually unlimited' opportunity for growth. "We continue to see the UK as the most immediate opportunity for GameStop," said Pachter, adding that "the UK has room for over 1000 GameStop stores," and targeting "the crown jewel of Blockbuster’s “non-core” assets" -- its UK chain Gamestation -- as GameStop's logical target, a move that "would be immediately accretive."