Diversification Could Be The Power-Up GameStop's Strategy Needs Now

GameStop Corp. (NYSE: GME) reported its fiscal fourth-quarter 2016 results in line with recently lowered expectations. With the game segment continuing to be under pressure, the focus is on the company’s diversification strategy, Baird’s Colin Sebastian said in a report.

While reiterating an Outperform rating and a price target of $24 for GameStop, Sebastian mentioned that the pullback in shares due to uncertainties makes the stock appealing for “longer-term/value-oriented investors.”

Q4 Results

GameStop reported a 16.3 percent decline in same-store-sales, due to soft sales of certain new game titles and aggressive hardware promotional activity. “We note that growth in Collectibles (+28 percent Y/Y) and Tech Brands (+44 percent Y/Y) remain encouraging as new store openings/category growth support the company's ongoing diversification,” Sebastian wrote.

2017 Guidance

Management guided to 2017 EPS of $3.10–$3.40, significantly short of the consensus expectation of $3.73. SSS is projected in the range of -5 percent to flat.

“We note that $0.25 of the EPS headwind results from higher expected tax rates, compounded by investments in new category growth, some deleverage in video game sales, and higher interest expenses,” the analyst pointed out.

Management indicated robust initial demand for Nintendo Switch, which could be a source of upside when supplies improve.

At last check, shares of GameStop shares were down 12.48 percent at $20.97.

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