Analyst: GameStop's future looks bright

Sterne Agee industry watcher says after tough 2013, growth for retailer expected in 2014 and 2015.

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Profits are on the horizon for GameStop, according to Sterne Agee analyst Arvind Bhatia. In a note to investors today, the industry watcher said though 2013 may be a difficult year for the retailer, the company is well positioned to benefit from "significant console industry growth" in 2014 and 2015.

"While most investors are still skeptical about the long-term prospects of GameStop, we believe sentiment is beginning to turn positive," Bhatia said. "At a minimum, we believe the short-thesis predicated on structural concerns may take a back seat in the near-term, especially as next-gen 'used games block concerns abate."

Based on conversations with Sony executives, GameStop management said last week that it has a "high degree" of confidence that the PlayStation 4 will play used games. Microsoft's next-generation Xbox is rumored to block or in some way prevent gamers from playing secondhand titles, though this platform has not been announced.

As part of its fourth quarter and full-year earnings report last week, GameStop acknowledged the console business was "challenging" in 2012. The retailer said this trend will continue for the first half of 2013 as consumers hold off on console purchases until new platforms are available later in the year.

Not only will GameStop benefit from the upcoming console cycle, Bhatia argued, but the retailer also has two revenue streams in 2013 that it did not have during the past console transition: digital and mobile. Revenue derived from these sectors, combined with GameStop capitalizing on other opportunities, will lead to healthy growth, he argued.

"When combined with the company's focus on cost control, real estate optimization, and large stock buybacks, we believe it can show mid-to-high teens [earnings per share] growth in 2014 and 2015," Bhatia said.

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