Pacific Crest Downgrades Gamestop; Why Shares Are Struggling Despite Tailwinds

• GameStop Corp. GME shares have appreciated 31.75 percent year-to-date, from $32.27 on January 9.
• Pacific Crest’s Evan Wilson has downgraded the rating on the company from Overweight to Sector Weight.
• Given the appreciation in the share price, and expectations of lower growth, driven largely by digital, Wilson prefers to move to the sidelines.

Analyst Evan Wilson had expected the company to return to new software growth in 2015, with potential for further growth in 2016. However, Wilson mentioned that physical software sales have “struggled to return to growth.”

New software sales grew only 2.3 percent through Q1 and Q2. Following the October NPD data at -3 percent and that for the three months ending in October at -4.9 percent, Wilson believes that the chances of GameStop returning to physical growth in new software appears more at risk, as compared to the consensus expectations of growth.

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Wilson also believes that the estimate of flat year-on-year sales for FQ3 is at risk, despite “a much better slate in 2015 and a much smaller headwind from declining old-gen sales.” The lack of robust growth is mainly due to “the ever-growing influence of digital downloads,” while the 2016 slate seems inadequate to drive growth.

The estimates have been revised to reflect no new software growth in FY2016, while total same store sales comps are expected to turn negative, driven by the recent hardware dollar trends.