GameStop - Hilliard - 0411

8/6/2019 GameStop - Hilliard - 0411

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Note Important Disclosures on Pages 5-6.

Note Analyst Certification on Page 5.

COMPANY UPDATE / RATING CHANGE

Key MetricsGME - NYSE (as of 4/20/11) $26.35

Price Target N/A

52-Week Range $17.7-$26.94

Shares Outstanding (mm) 152

Market Cap. ($mm) $3,707

3-Mo. Average Daily Volume 4,650,585

Institutional Ow nership 91%

Long-Term Debt/Total Capital (1/11) 8%

ROE (1/11) 13.4%

Book Value/Share (1/11) $18.3

Price/Book Value 1.4x

Dividend Yield Nil

LTM EBITDA Margin (1/11) 8.8%

EPS FY 1/31* (excludes nonrecurring items)

Prior Curr.

2009 2010 2011E 2011E

1Q $0.43 $0.48 -- $0.53

2Q $0.23 $0.26 -- $0.28

3Q $0.32 $0.38 -- $0.41

4Q $1.29 $1.56 -- $1.62

Year $2.27 $2.67 $2.84

P/E 11.6x 9.9x 9.3x

*Fiscal year ends Saturday closest to January 31of the fo llowing year.

Quarterly EPS f igures may not add t o annual figure due to rounding.

Revenue ($mm)Prior Curr.

2009 2010 2011E 2011E

1Q $1,981 $2,083 -- --

2Q $1,738 $1,799 -- --

3Q $1,835 $1,899 -- --

4Q $3,524 $3,693 -- --

Year $9,078 $9,474 $9,810 $10,060

Company Description: GameStop Corp. is the worlds

largest videogame retailer. The company sells new and

pre-owned software, hardware, and accessories for

current gaming systems and the PC. The company

recently operated 6,670 stores in 17 countries. GameStopalso operates e-commerce sites, owns browser-based

game site Kongregate.com, and publishes Game Informer

magazine (the largest multi-platform videogame magazine

in the U.S.).

Entertainment & LeisJeffrey S. Thomison,

J.J.B. Hilliard, W.L. Lyons,502.588.9137 / JThomison@hilliard

April 21,

GameStop Corp.GME NYSE Neutral-3

Lowering Rating to Neutral

Investment Highlights

We are lowering our rating on GME to Neufrom Buy. This downgrade is based solely on recshare price appreciation and not compfundamentals. In the calendar year-to-date perGME shares are up 15% compared to a 6% increasethe S&P 500. More recently, over the past monthstock is up 24% versus a 2% gain for the ovemarket. Most importantly, GME has nearly reacour former price target of $27 per share.

The company recently conducted its first einvestor conference and sentiment seemed

improve considerably following the event. We wimpressed with the companys extensive slide sh presentation, which covered a multi-faceted straincluding maximizing the potential of the store bimproving the high-margin pre-owned game businfocusing on digital sales opportunities, and deployfree cash flow.

We believe overall business risk has declined o

the past few quarters. The trend toward digital shas seemingly gone from a perceived threat toattractive opportunity for GameStop, the videogaindustrys largest retailer. Recent management tadditions, some acquisitions, and new businventures have collectively improved the compandigital prospects considerably, in our view.

Although the stock valuation remains somewappealing to us, we believe a favorable earni

outlook and improving digital prospects are larg

factored in the share price. Our previous price taof $27 reflected a 9.0 multiple applied to our FYEPS estimate. With this target nearly realized (mearlier than we expected), we are inclined to movethe sidelines for now as we prefer a lower price purchases.


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GameStop Corp. April 21, 2011

Hilliard Lyons Equity Research 2 Entertainment & Leisure

INVESTOR CONFERENCE HIGHLIGHTS

On April 1, 2011, GameStop conducted its first-ever investor conference near its Grapevine,Texas headquarters. We were unable to attend the conference live, but listened via webcast. In addition,the company made available its 80-page slide presentation. We believe the conference had a favorableimpact on investor sentiment. A deep, senior level management team participated, including recent hires,

and insight on the companys digital sales strategies was encouraging, in our view. In sum, we believethe trend of digital sales has evolved from perceived threat to attractive opportunity for the videogameindustrys largest retailer. Below are some highlights from the slide presentation.

Management recognized a changing industry landscape in 2008 and began developing businessplans related to downloadable content, customer loyalty program, and e-commerce.

The global gaming market is estimated to grow about 6% annually through 2014.

Greater efficiencies could result from selected closing of overlapping retail stores that resultedfrom past acquisitions.

New stores in underserved markets have relatively flexible leases and generate strong returns.

International operations have recently improved and much opportunity exists for adding stores inhigh growth markets and closing stores in underperforming markets.

Compounded annual growth for worldwide industry digital sales is expected at about 15%through 2014. GME expects its total digital sales to grow at more than twice this rate.

Digital opportunities include sale of videogame content at GameStop.com, downloadable contentvia in-store kiosks, full-game PC downloads, and digital issues of Game Informer magazine.

Recent acquisitions should boost GMEs digital capabilities: Spawn Labs owns patentedtechnology for digital streaming of videogames and Impulse, Inc. has a digital distributionplatform that specializes in downloading of games to Internet-connected devices.

Opportunities exist in the high-margin pre-owned business, as currently less than half ofcustomers are buying used games and less than 20% are trading in (selling) games.

The PowerUp customer loyalty program was recently launched and has already grown to over 8million members; management expects 12-15 million by the end of 2011.

PowerUp members are spending more than 3x the amount of non-members; members have listed

over 90 million games they own, which helps GME in terms of selling downloadable content forcertain games or boosting its pre-owned game business by means of targeted marketing.

Higher earnings and lower capital spending needs should boost free cash flow by 10% in 2011;debt retirement and stock buybacks may continue, as could acquisitions.

Earnings growth could come from continued expansion of the PowerUp loyalty program, marketshare gains, same-store sales growth at retail stores, greater profitability of store base fromstrategic downsizing, growth of digital revenue streams, and utilization of free cash flow.

OUTLOOK

Despite an uncertain consumer spending environment, recent sluggishness in industry sales, and

investment community concerns regarding digital sales of videogames, GME management has painted arelatively bright picture for the current fiscal year. The companys packaged good segment seems to havefirmed up and numerous high-profile releases are slated for the coming quarters. Over the past year, thecompanys share of such releases has increased due to strong marketing campaigns and coordinatedefforts from the major publishers. The PowerUp customer loyalty program has exceeded expectationsand holds much potential, in our view. Finally, the company seems to be a key participant in the industrytrend toward digital sales of videogames, rather than a potential victim. We expect the digital business togrow over 50% annually in the near term, with the packaged goods segment holding steady.


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VALUATION & OPINION

GME shares are trading at 9.3 times our FY11 EPS projection of $2.84, a higher valuation thanearlier this year or much of last year. GMEs forward price/earnings multiple has been in the range ofroughly 7 to 35 over the past five years, with an average multiple of about 11.5. We attribute GMEsrelatively low valuation to several factors, including recent industry sluggishness, the potential impact of

competitive entry (such as the used game business), and long-term risks associated with distribution ofvideogames. While the current multiple still seems relatively low, we believe considerable share priceappreciation this year has reduced the stocks near-term attractiveness.

With recent considerable share price gains, our former price target of $27 was nearly realized.This target reflected a price/earnings multiple of 9.0 applied to our preliminary FY12 EPS estimate of$3.00. This is above recent valuations as low as 7 times estimated forward earnings. Although the stockvaluation has some appeal to us, we believe a favorable earnings outlook and improving digital prospectsare largely factored in the current price. With our price target essentially realized (much earlier than weexpected), we are inclined to move to the sidelines for now as we believe the shares could be susceptibleto some profit-taking from shorter term investors. We could reinstate our purchase recommendation on apotential pullback in the share price, assuming no change in company fundamentals.

RISKS & SUITABILITY

Among concerns frequently raised by the investment community are competitive entry to theused game business and digital downloading of content by consumers. While new entrants to the usedgame business over the past year or so have raised some concern among investors, we feel GME hascompetitive advantages such as those related to inventory, pricing acumen, employee expertise, andmarketing. To date, management has not seen an adverse impact on its stores from competitive entry intothe used gaming sector. Digital distribution of videogames is likely to continue growing, but we believeGameStop has been pro-active in developing a digital sales strategy that seems, at this early juncture, tobe effective.

Other risk factors associated with investments in GameStop include changes or delays in publishers product release schedules; relationships with and adequate supply from publishers,distributors, and hardware manufacturers; lease terms for stores; cyclicality of industry sales;macroeconomic risk; seasonality or dependence on holiday sales; ability to negotiate and integrateacquisitions; and geopolitical risks to international operations.

Our Suitability rating on GME is 3 on a 1-to-4 scale (1=most conservative, 4=most aggressive),and is primarily based on these factors.


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Additional information is available upon request.

Analyst Certification

I, Jeffrey S. Thomison, hereby certify that the views expressed in this research report accurately reflect

my personal views about the subject company(ies) and its (their) securities. I also certify that I have notbeen, am not, and will not be receiving direct or indirect compensation in exchange for expressing thespecific recommendation(s) in this report.

Important Disclosures

Hilliard Lyons' analysts receive bonus compensation based on Hilliard Lyons profitability. They do notreceive direct payments from investment banking activity.

Investment Ratings

Buy - We believe the stock has significant total return potential in the coming 12 months.

Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returnsto be realized over a longer time frame than our Buy rated issues.

Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may beused as a source of funds if better opportunities arise.

Underperform - We believe the stock is vulnerable to a price set back in the next 12 months.

Suitability Ratings

1 - A large cap, core holding with a solid history

2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject toevent driven setbacks

3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic

earnings or high leverage4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volumeor a narrow customer or product base

Hilliard Lyons Investment Banking

Recommended Issues Provided in Past 12 Mo.

# of % of

Rating Stocks Covered Stocks Covered Banking No Banking

Buy 40 24% 0% 100%

Long-term Buy 35 21% 6% 94%

Neutral 89 53% 1% 99%

Underperform 3 2% 0% 100%Restricted 1 1% 100% 0%

As of 4 April 2011


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Note: Price targets accompanying Buy ratings reflect a one year time period while price targets accompanying Long-term Buy

ratings reflect a two to three year time period.

Other Disclosures

Opinions expressed are subject to change without notice and do not take into account the particularinvestment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard,W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or

trading strategies that differ from the opinions expressed here.

J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeksinvestment banking assignments and compensation from issuers for services including, but not limited to,acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving asplacement agent in private transactions.

The information herein has been obtained from sources we believe to be reliable but is not guaranteed anddoes not purport to be a complete statement of all material factors. This is for informational purposes andis not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized.All rights reserved.

J.J.B. Hilliard, W.L. Lyons, LLC has entered into an agreement with Morgan Joseph TriArtisan LLCwhereby Morgan Joseph TriArtisan LLC pays Hilliard Lyons based on revenues generated by MorganJoseph TriArtisan LLC from Hilliard Lyons research.

GameStop - Hilliard - 0411

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