GameStop Corporation (GME) is well positioned to take advantage of the growing market for video game products and PC entertainment software. The company’s strategy is to grow through store expansions in favorable localities, by providing the largest title collection of video games and leveraging its first-to-market distribution network to offer the latest hardware and software releases.
The company holds a significant position in the used video game products market. GameStop provides a greater selection of used video game products for both current and previous generation platforms. The market for used video game products has been resilient to the recent economic downturn.
GameStop has been also actively managing its capital. The company intends to generate adequate cash flow from operations in the next four to five years, to fund opening of new stores, make improvements to existing stores, renovate, execute buyout plans and carry out a share repurchase program.
Moving forward, GameStop now expects fiscal 2011 earnings in the range of $2.82 to $2.92 per share, and expects an increase of 3.5% to 5.5% in comparable-store sales.
For second-quarter 2011, GameStop anticipates comparable-store sales in the range of -2.0% to flat, and earnings between 20 cents and 23 cents a share.
GameStop recently announced the acquisitions of Spawn Labs, a technology company, which allows users to view video almost in real time, and Impulse Inc., a leading company in digital circulation.
The acquisition of Spawn Labs will enable the clients of GameStop to gain instant access to a large number of HD quality video games on demand and facilitate the company in delivering a rich experience to its customers through Web-enabled devices.
Additionally, Impulse Inc. offers a vast digital distribution platform, thereby helping users to access their preferred games instantly with an option of downloading the same through their Web-enabled devices.
The gaming industry is experiencing a transition leading to a decline in handy and console game sales with a rise in consumer spending on digital download, mobile gaming apps and social network games. In such a scenario, the acquisitions will help GameStop to hold its ground.
The video game industry is highly competitive and retail heavyweights such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT) and Best Buy Company Inc. (BBY) have also entered the video game market. These larger retailers could dent GameStop’s sales and margins.
Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels. This may prompt consumers to curtail their entertainment expenditures, which in turn, could result in lower store traffic and reduced profitability for the company.
Currently, consumers can only download a limited number of PC entertainment software and older generation video games from the Internet. However, with the advancement of technology, if consumers’ accessibility increases, they may no longer prefer to buy PC entertainment software and video games through the company’s retail stores.
Given the pros and cons, we prefer to remain Neutral on the stock over the long term. GameStop also holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.
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