GameStop surges before earnings on a possible sale talk

GameStop (GME) is set to report results for the second quarter of 2018 on Thursday after the market closes. Analysts expect the company to post a decline in earnings and revenue for the quarter. The company has been struggling to gain customers in stores due to an increase in online game-software downloads. The stock opened lower today but turned higher due to a report that the company is working with Perella Weinberg Partners to explore a possible sale.

GameStop is now running a formal auction after remaining as a takeover speculation for months, according to DealReporter. The two main suitors are private equity firms Sycamore Partners and Apollo Global Management. Investors are turning their hopes on the stock as a buyout could give them pay after facing five-year stock slide.

Analysts, on average, expect the multichannel video game operator to post earnings of $0.08 per share for the second quarter compared to the profit of $0.15 per share reported a year ago. Sales are predicted to fall by about 4% to $1.62 billion. Most of the analysts had recommended a “hold” rating on the stock with an average price target of $14.55, which the company had surpassed during today’s regular trading session.

The company had posted consecutive earnings surprise in the past three quarters. Investors are looking forward to an earnings surprise despite analysts expecting a 46.7% year-over-year plunge. Growth estimates are likely to fall by 6.9% per annum in the current year and 8.7% in the next year.

During the recently completed first-quarter, lower sales, store closure charges, and charges related to management changes hurt the bottom line by 52.2%. The top line fell by 5.5% resulting in a comparable-store sales decline of 5.3%. New hardware sales dropped by 7.9% and new software sales fell by 10.3% from last year, which benefited from the highly successful launch of the Nintendo Switch in the first quarter of fiscal 2017.

Pre-owned sales declined 5.8% and worldwide omnichannel sales plunged 46% due to limited allocation of the Nintendo Switch at launch, which drove a 92.9% increase in omnichannel sales in the first quarter of fiscal 2017.

GameStop earnings plunge 52% in Q1

For full-year 2018, the company had predicted adjusted earnings in the range of $3.00 to $3.35 per share and total sales to decline by 2% to 6%. Comparable-store sales are estimated to be in the range of flat to down 5%. Capital expenditures are projected to be in the $110 million to $120 million range.

Investors expect the company’s Q2 bottom line to be benefited by more store activities, sales from video game hardware and software titles. The company is expected to highlight the potential sale opportunities as well as store openings and closings at the earnings call. Traders are predicting GameStop to lower or tighten its full-year guidance. Zacks Equity Research believes that the retailer doesn’t appear as a compelling earnings-beat candidate.

Shares of GameStop surged more than 15% at 3:30 PM ET. The stock had dropped about 13% so far this year, while it increased about 16% in the past one year.