All’s Not Lost for this Video Game Retailer
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world’s largest retailer of video games is having a tough time. GameStop’s (NYSE: GME) shares took a massive beating after the company posted mixed results for the first quarter and sounded out a dismal outlook. The stock has already made investors poorer by almost 21% this year and faces a tough challenge of turning things around.
What ails GameStop?
GameStop faced a downturn in its business due to lack of any new gaming titles and low console sales. As a result, the company’s same-store sales went down 12.5% from last year and dragged down revenue along with it to $2 billion, 12% lower than last year.
The fall in revenue and customer traffic doesn’t come as a big surprise. Gaming consoles such as Microsoft’s (NASDAQ: MSFT) Xbox 360 and Sony’s (NYSE: SNE) PlayStation 3 have been in the market for more than five years now. Given that they have been selling for so long, it’s quite natural that their sales would dry up as time goes on and these consoles reach the end of their cycle. GameStop might see a reversal in fortunes once Microsoft and Sony release the next generation of their consoles. The rumor mill says that Sony has lined up a Christmas 2013 release for the PlayStation 4. The same source also tells us that Microsoft might launch the so-called “Xbox 720” at around the same time or in 2014.
So as far as the next cycle of gaming consoles is concerned, GameStop will still have to wait for another couple of years for the biggies to arrive if we are to go by the rumors. But this is not the only problem pinching the company. The New Video Game Software business made up 36.5% of revenue in the quarter, down from 40% last year. GameStop’s CEO said that they have also suffered due to the absence of any big game titles. Although a couple of big name games such as Max Payne 3 by Rockstar Games and Diablo III by Activision Blizzard (NASDAQ: ATVI) have been released recently, GameStop is being cautious in its outlook and doesn’t want to jump the gun by giving out an overtly positive forecast.
But all’s not lost
However, there were also a number of positive takeaways from GameStop’s otherwise drab quarter and glum guidance. The company’s pre-owned business grew to 31% from 27.4% last year. Moreover, management expects this segment to grow with time as GameStop is now ahead of its peers in selling pre-owned content. Most of its major rivals have either tuned down their used video game products business or have winded it up.
GameStop’s digital business has been growing at a brisk pace, jumping 23% from last year. The company’s PC downloads business spiked an amazing 172% and it has added another 1,600 games to its Kongregate.com platform through which it sells them. Moreover, the company is also offering trades for pre-owned Apple devices at its stores. The number of stores trading in Apple devices was 2,200 in the quarter and GameStop plans to increase them more with time. This trade-in business of iDevices has been quite fruitful for GameStop so far and it expects to deliver value in the future as well.
GameStop might be facing trouble in sustaining its traditional business, but it is indeed making an effort to change with times. Its venture in selling used tablets and foray into digital content will go a long way to help GameStop get back on track again. It has signed deals with Microsoft, Sony and Activision Blizzard for providing downloadable content (DLC). Thus, it would make sense to not completely ignore and call a full stop on GameStop’s prospects.
Also, the back end of the year might bring some good news for GameStop investors. The company is preparing itself for the Nintendo Wii U launch this fall and this marks the beginning of the next console cycle. Also, Activision Blizzard is slated to launch the next version of last year’s most successful game in the form of Call of Duty: Black Ops 2. These developments will hopefully help arrest the slide that GameStop has seen so far this year.
The bottom line
With all the moves that the company is making to improve its business prospects, I believe the heydays for the world’s largest video game retailer are far from over. The advent of the next console cycle, release of major titles and growth in digital and pre-owned business are factors that shouldn’t be overlooked. Even though the stock has been nothing but painful so far this year, it can still deliver value in the long run.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard, GameStop, and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.