Game Digital unwraps better Christmas than feared

Following a profit warning just before Christmas, computer games retailer Game Digital revealed trading was more stable than it had feared, with improving trends in the UK and Spain.

Group gross transaction values, essentially sales excluding VAT and deferred revenues from reward points, were down 0.4% in the three weeks to 9 January, an improvement from the 6.7% decline reported for the previous 21 weeks. As result, revenues for the 24-week period were down 5.5%.

UK retail GTVs for the festive period were down 5.9%, compared to an 11.4% decline in the previous 21 weeks and resulting in a 10.5% fall over the longer time span.

Spain was the only region to show genuine growth, improving on its strong performance in the first 21 weeks of the year, with 10.6% growth in the Christmas period.

The board reiterated its guidance for adjusted earnings before interest, tax, depreciation and amortisation for the 26 weeks to 23 January 2016 of around £30m, ahead of interim results scheduled for 23 March.

Chief executive Martyn Gibbs said the recent challenging trading conditions in the UK video games market had alleviated, with "a better market and an improved sales trend" over the last three weeks.

He said initiatives to improve UK profitability were already being implemented, alongside other plans to drive operational efficiencies in the business.

"Looking forward, we see a solid schedule of new games releases planned during the second half of our financial year. We also anticipate that new technology releases this year, in particular the launch of Virtual Reality devices, will lead to increased consumer interest which will benefit GAME as customers seek expert advice and specialist service."

"We believe that these factors, together with the continued move towards high margin new-format mint and preowned software and accessories and a growing contribution from the group's newer categories and businesses, including GAMEtronics and Multiplay, will support margin growth in our second half and beyond."

Shares in Game were up 5.75% at 105.75p by 1115 GMT on Wednesday, well short of the 205p level they enjoyed before the recent profit warning.

Broker Canaccord noted that the shares now trades on a p/e of 9.0 times, backed by a 7.8% yield on conservative dividend assumptions and potential positive catalysts including virtual reality product launches in 2016 and the growing platform in eSports.

"The discount looks excessive to us, despite recent disappointment," analysts said, but lowered the target price to 115p from 183p to reflect the lower dividend and heightened risk discount.