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Unexpected Decline In Hardware Sales Led GameStop To Mixed Q2 Results; Baird Says Buy On Pullback

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Unexpected Decline In Hardware Sales Led GameStop To Mixed Q2 Results; Baird Says Buy On Pullback

A day after GameStop Corp. (NYSE: GME) reported a sales miss for the second quarter, Baird Equity Research cited an unexpected drop in hardware sales that led to mixed results. However, the brokerage maintains an Outperform rating on the stock and slashed the price objective by $2 from $42 to $40.

Analysts Colin Sebastian and Benjamin Gaither counseled investors to buy the stock on any pullback. Incidentally, the stock is trading down by more than 9 percent following the sales miss despite its EPS beating the estimates.

The lead analyst said in the research note, "Lower used product margin along with video game market share losses highlight ongoing secular headwinds; however, better-than-expected 'Tech Brands' and Collectible sales/margins were key positives. Looking ahead, we expect improving seasonal trends, with added benefits from HW launches (including PlayStationVR) and recent AT&T reseller acquisitions."

Related Link: Technical Alert: Finding Support In GameStop After Q2 Report

Investors appear worried over the weak comparable store sales in the second quarter. Baird pointed out that comps dropped 10.6 percent compared to a 5.9 percent fall estimated by analysts. This was attributed to a drop in hardware sales after news broke out about VR launches and future consoles. This was evidenced in 33 percent year-over-year drop in hardware sales, whereas fresh software sales witnessed an 18 percent fall, indicating that the second quarter was a tough one.

While margins recorded the seventh straight quarter of year-over-year drops, the analysts expect stability in the second half of the current year. Similarly, the brokerage thinks diversification tactics are paying, evidenced by 40.3 percent year-over-year sales growth and tech brands revenue jumping 55 percent and beating expectations.

At time of writing, GameStop was trading at $28.97, down 9.92 percent on the day.

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