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. Sales of used video games registered a growth of 12% to $633.1 million, whereas digital sales soared 69% during second-quarter 2011.
The healthy used video games and digital sales led to a gross margin expansion of 250 basis points to 31.2%.
However, GameStop experienced a sharp decline in its bottom-line. The quarterly earnings of 22 cents a share came down 15.4% from 26 cents earned in the prior-year quarter but remained a penny ahead of the Zacks Consensus Estimate.
GameStop posted total revenue of $1,743.7 million for the quarter that came below the Zacks Consensus Revenue Estimate of $1,819 million and declined 3.1% from the year-ago quarter. The retailer stated that comparable-store sales decreased 9.1% during the quarter, reflecting sluggish hardware sales and soft schedule of new software title releases compared to the prior-year period.
Consequently, GameStop trimmed its fiscal 2011 comparable-store sales guidance. The company now expects comparable-store sales to increase in the range of 1.0% to 3.0%, reflecting a revenue growth of 4.5% to 6.5%. Earlier the company forecasted a 3.5% to 5.5% increase in comparable-store sales.
However, contrary to market expectations, GameStop stood by its fiscal 2011 earnings guidance of $2.82 to $2.92 per share.
GameStop had integrated Impulse Inc., a leading company in digital circulation, on its website. In recent times, there has been a sharp rise in consumer spending on digital download, mobile gaming apps, social network games and used games. In such a scenario, GameStop Impulse will help the company to strengthen its foothold.
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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