I’ve been going through the last 10Q (Q3) for GameStop (GME) and one thing struck me. This isn’t a company that is a fraud per se, I think they are just not being honest with shareholders (or are in denial themselves). I would lean to “in denial” as I am sure Tower Records, Blockbuster, Borders & Circuit City execs thought until the inevitable end they could turn things around. Look at the YOY sales breakdown below. Fewer new games sold are leading to fewer used games sold and less store traffic. Now, we have been told over and over by the folks at $GME the new “Big Release” games like Halo and Call of Duty coupled with the Wii U console release were going to boost sales and stop the declines. But we learned this week that was not the case.
The data as well as the explanation from the company below back the short thesis (though I am sure this is NOT intentional). The only category that is increasing for the company is the “other” category which include their digital segment (downloadable games). This is also the case industry wide as consumers move to digital. The real problem for $GME is 70% of their profits come directly from selling and then reselling consumers those DVDs. Now, the game DVD is not going away overnight, but it is going away. $GME will see this business continue to erode until it reaches critical mass and collapses. That very well may be when the new consoles come out. While they will not be “download only”, they clearly will be designed to maximize that aspect.
The question bulls have to ask themselves is: “why will games makers like Electronic Arts (EA) or Microsoft (MSFT) want to continue to pay a middle man like $GME to sell their games when they can go direct to the consumer and be more profitable?” The obvious answer is they won’t. The retort is usually that not everyone has download speed fast enough to make downloading a game feasible. That is also true. But if we are being honest I think we have to concede that gamers tend to have “the latest” in terms of games and equipment and given the success of Xbox live and gamers playing each other online,we can assume fast internet speeds are not a luxury but a must for them. While there will be those assuredly who do not have fast internet speeds, I would say these folks would be on the fringe of the spectrum and not the key players the industry is selling the latest games the second they come out.
Here are the numbers … I fully expect these to continue to slide. Remember, Call of Duty set a sales record when it came out and Halo had a fantastic launch also. Neither of these were enough to save the quarter for $GME and the economy continues to recover. If that won’t do it ... they are running out of excuses. If two huge game releases and a new console release in the Christmas quarter can’t do it, what will??
Net sales decreased by $174.0 million, or 8.9%, from $1,946.8 million in the 13 weeks ended October 29, 2011 to $1,772.8 million in the 13 weeks ended October 27, 2012. The decrease in net sales was primarily attributable to a decrease in comparable store sales of 8.3% for the third quarter of fiscal 2012 and changes related to foreign exchange rates, which had the effect of decreasing net sales by $27.0 million when compared to the third quarter of fiscal 2011. Stores are included in our comparable store sales base beginning in the thirteenth month of operation and exclude the effect of changes in foreign exchange rates. The decrease in comparable store sales was primarily attributable to decreases in new video game hardware sales, new video game software sales and used video game product sales, offset partially by an increase in other product sales.
New video game hardware sales decreased $92.8 million, or 33.4%, from $277.6 million in the 13 weeks ended October 29, 2011 to $184.8 million in the 13 weeks ended October 27, 2012. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle. New video game software sales decreased $109.3 million, or 12.4%, from $879.1 million in the 13 weeks ended October 29, 2011 to $769.8 million in the 13 weeks ended October 27, 2012, primarily due to lower sales of new release video game titles in the third quarter of fiscal 2012 when compared to the third quarter of fiscal 2011 given the titles available for sale and the late stages of the current console cycle. Used video game product sales decreased by $48.2 million, or 8.9%, from $544.5 million in the 13 weeks ended October 29, 2011 to $496.3 million in the 13 weeks ended October 27, 2012. The decrease in used video game product sales was primarily due to a decrease in store traffic related to lower hardware and software demand due to the late stages of the current console cycle. Other product sales increased $76.3 million, or 31.1%, from the 13 weeks ended October 29, 2011 to the 13 weeks ended October 27, 2012. The increase in other product sales was primarily due to an increase in sales of PC entertainment software and an increase in sales of mobile devices in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011.
As a percentage of net sales, new video game hardware sales and new video game software sales decreased and other product sales increased in the 13 weeks ended October 27, 2012 compared to the 13 weeks ended October 29, 2011. The change in the mix of sales was due primarily to the increase in other product sales as a result of the expansion of the mobile sales category and growth in the PC entertainment software category due to new releases. These categories showed significant growth in the third quarter of fiscal 2012 while sales of new video game hardware and new video game software decreased due to lower sales of new release software titles compared to the same period last year and lower hardware sales due to the late stages of the current console cycle.
Here is a very interesting article on the whole industry
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.