Think Gamestop Is Recession-Proof? Think Again

We just talked about Gamestop (GME) a few days ago [May 18: Gamestop (GME) Faces Potential Challenge from Walmart (WMT) on Used Video Games], and this morning the company is out with a 2nd quarter warning. If indeed Americans are cutting back on one of the few affordable luxuries such as video games - which have been among the most recession-proof things out there - I think you can fill in the blanks about "green shoots". But I guess we can blame those Europeans - they are a convenient scapegoat. Either way, there is a subtle shift going on as less gamers can pay up for the new games, and instead are going to used. As I said in the piece earlier this week

It is quite amazing how often "the stock" knows, ahead of the news... Gamestop (GME) despite a virtual monopoly on pure play video game retail (one of the few recession proof niches) has been a massive underperformer, especially as institutional money flows into the retail niche as an "early cycle recovery" thesis. In fact it's closer to March lows than recent highs.

It is uncanny how "stocks" know the news ahead of the news... eh?

Via Reuters

• Video game retailer GameStop Corp (GME) said on Thursday its first-quarter profit rose 13 percent, driven by sales of popular titles like "Resident Evil 5" and "Street Fighter IV, but same-store sales fell more than expected.
• GameStop, said net income was $70.4 million, or 42 cents a share, up from $62.1 million, or 37 cents a share, a year earlier. Sales rose 9.2 percent to $1.98 billion, the Grapevine, Texas-based company said.
• But comparable store sales - sales at stores open at least a year - were lower than the company expected, declining 1.5 percent, due to the recession in Europe and a slowdown of new console sales that occurred late in the quarter.

Now this is the quite frightful comment

• The company expects to earn between 28 cents to 33 cents a share in the its fiscal second quarter. It also expects same store sales to decline by 8 percent to 11 percent.

Yet, still they think they will make the number for the year due to a range of new titles.

• But it reiterated its full year diluted earnings range of $2.83 to $2.93 with same store sales expected to range from flat to up 2 percent.
• Chief Executive Daniel DeMatteo said the company "sustained its strong earnings growth momentum … despite less-than-planned comparable store sales." He also said the second half of this fiscal year is expected be stronger than the first half because of a "wide-ranging" lineup of new titles.

Remember how dependent (25% of sales and boffo profit margins) they are becoming on used game sales [Jan 21, 2009: WSJ - Used Games Score Big for Gamestop]

• Gross margin rose to 27.4% from 26.1%.
• New-game software sales slid 2.8% while new hardware sales rose 17%. Sales of used games jumped 32%.
• GameStop, which is based in Grapevine, Texas, opened 114 new stores during the quarter. In February, it said it planned to open more than 400 stores this year.

Bull have to hope this $22 level holds, or otherwise there is quite a bit room down from here on the chart

[Mar 5, 2009: Gamestop Hit by Amazon.com's Move into Used Games]

Disclosure: No position

Comments

[Chris Lau:]

Do you believe GME will be able to deliver on their EPS forecast? It's trading at a mere 8x and mgt. appears to suggest hardware prices will fall. I don't see that happening though.

May 23 11:19 PM

[TraderMark:]

It is a cheap valuation down here, from a value play it might be worth the plunge but GME has usually been thought of as as a "growthy" story. That said, a lot of retailers are valued at 12-17x so it's cheap even for moderate growth. Obviously the elephant in the room is if the Walmart move has a serious affect on those earnings. Then 8x earnings quickly can turn into 13-14x if earnings misses happen in the future.

I think for a value investor with a long term outlook who is ok with the potential for some sideways or short term losses its actually a decent value down here.

May 24 07:21 PM