Positive results from US computer game specialist GameStop have done little for its UK peer Game Digital.
GameStop reported a better than expected 3.2% rise in first quarter sales on Thursday, and although it said growth was likely to slow in the second half it raised its guidance for full year revenue growth by 2%.
But analyst Simon Davies at Canaccord Genuity said there was little read-through for Game Digital:
Unfortunately, all the market evidence points to a significant divergence between the performance of GameStop’s core market, the US, and what has been a weak UK market so far in calendar 2015. MCV reported a 17% year on year drop in games volumes in the UK in March. Average prices increased with the mix shift in favour of the next generation of games products, but revenues were still down by 10.2%.
And the decline continued into April, with UK market volumes for new software down by 6.7%. Significantly, this data excludes digital sales, which have been growing rapidly. Game has a dominant share in both the UK and Spanish markets for console digital content sold at retail, and this is much higher margin revenue.
Nonetheless, we had forecast Game to generate double-digit revenue growth in its second half, backed by more buoyant sales of next generation software. Sales of new titles have remained robust, but back catalogue sales have been consistently weak since the fourth quarter of 2014 (calendar), having been badly impacted by the high level of discounted bundles during the Black Friday/Cyber Monday sales last year. And we see this putting downward pressure on revenue trends.
Game Digital reported flat revenues in its first half (to end January 2015), but after a soft start to its the second half, it had expected activity levels to pick up over Easter and also benefit from stronger product launches at the end of 2015 (i.e. Batman: Arkham Knight, released next month).
Given weaker UK market trends through its third quarter, we are reducing our revenue assumptions, bringing 2015 revenues down from £905.2m (Bloomberg consensus is £906m) to £869.7m. However, this partly reflects weaker hardware sales (at low margins) and a shift to higher margin digital content (higher margin), so the impact on earnings per share is more modest, with our pretax profit (norm) coming down from £38.8m/17.5p to £37.1m/16.8p, a 4% downgrade - consensus is £38.7m/17.4p. The 2016 forecast earnings per share downgrade is also 4%.
Davies said Game shares are supported by a 5.9% dividend yield and there was scope for further cash returns to shareholders after the special dividend paid in February.
But he edged his target price from 281p to 270p to reflect the cut in earnings, and Game is currently 1.25p lower at 247.75p.
