Following the recent fiscal report from retailer GameStop (the company produced over $7 billion in sales in 2007) Wedbush Morgan Securities analyst Michael Pachter has commented on the company's revenue guidance, noting that he was "surprised" by it and he's "skeptical that the company can deliver comps at the high end of its guidance."

"The company's comp guidance of 10 – 12% suggests that GameStop can grow its software sales by 24 – 29% overall (implied new store contribution of 9%) and grow its hardware sales by around 9 – 10% (all from new store contribution). In the context of last year's 39% software sales growth and 55% hardware sales growth, these targets appear modest. However, we note that GameStop's suppliers (publishers Activision, Electronic Arts, Ubisoft and THQ) expect software sales growth of only 10 – 12% for the year, and most industry observers (ourselves included) expect hardware dollar sales to be flat for the year," he stated.

He continued, "Further confounding us is GameStop management's apparent memory lapse about its performance in holiday 2002. That year, the company consistently guided to Q4 comps of 8 – 12% (the last time on November 18, 2002). On December 18, 2002, GameStop preannounced that its comps would instead be –4 to –6%, and attributed the shortfall to a shift in hardware market share from it and peer specialty retailer Electronics Boutique (since merged into GameStop) in favor of the mass merchants on the anniversary of the Xbox and GameCube launches. It appears that once hardware supply was sufficient to satisfy demand, gift givers tended to purchase hardware when it was convenient, causing a market share shift from destination specialty retailers in favor of more frequently visited mass merchants. We expect a repeat of the 2002 phenomenon in 2008."

Ultimately, Pachter believes that the industry will grow by 20 percent in 2008, and he's "comfortable that GameStop can grow its overall software sales at the high end of the 24 – 29% rate implied by its guidance." He also anticipates that the retailer's used game sales will grow 29 percent. However, he continues to "question GameStop's hardware sales growth confidence, and have modeled a 1% decline in hardware sales for the year."

Pachter has issued a "Hold" rating on GameStop's stock. "Some may question why we have a Hold rating on a company that is expected to grow earnings by approximately 30% for each of the next two years. The answer is quite simple: we expect the mix shift in favor of higher margin software to moderate in FY:10 and beyond, and expect flattish comps and more modest earnings growth beginning that year," he explained. "In our view, once GameStop becomes more of a 'pure play' software retailer, the company should be expected to deliver sales growth of around 5% and earnings growth of around 15%. ... we think it is prudent to recognize that GameStop's run as a secular growth story will likely come to a halt over the next two to three years."