GameStop (GME) is expected to announce earnings for the first quarter of 2013 Thursday, May 23. Industrywide tailwinds brought on by console fatigue are expected to affect the video game retailer’s sales for the three months ending April. Video game sales across the U.S. fell 25%,year-on-year in April, according to market research firm NPD Group.
GameStop has a market share of over 30% of software sales in the country, and its market position helped it beat the industry trend last year. The company’s stock has surged more than 40% since it reported better-than-expected earnings for the fourth fiscal quarter of 2012. Our $33 price estimate for the company’s stock implies a discount of 10% to the current market price.
Staying One Step Ahead
GameStop operates in 15 countries across the world, but more than three-quarters of its sales are in the U.S. where the company is the market leader in sales. GameStop uses a swap-shop model, wherein customers can trade in their games for cash or points, which can be redeemed for other games. There are more than 30 million members enrolled in GameStop’s PowerUp, Megacard, EB World and GameStop Plus programs in the United States, Europe and Australia.
The company’s business model and market position helped it beat the slump in video game sales in 2012. While the U.S. video game market saw a 25% decline in hardware sales and a 21% decline in software sales through 2012, GameStop reported a 7% decline in sales for the fiscal year, with a 17% decline in hardware sales and a 12% decline in new software sales.
A further decline in revenues is expected this quarter as the prolonged product cycles of Microsoft’s (MSFT) X-Box 360 and Sony’s (SNE) Playstation 3 have led to console fatigue amongst gamers and developers. Video game sales fell 10% in March and 25% in April.
Why Do We Expect A Long-Term Recovery?
The current generation of video game consoles came into the market over eight years ago and their product cycle is now in decline. Both Microsoft and Sony are expected to launch their eighth generation consoles in the 2013 holiday season. While console fatigue is apparent among gamers from the sales figures, video game developers, who are gearing up for the console transition, have also played a hand in the sales decline. Electronic Arts (EA), 15% of whose sales come from GameStop, has been cutting down on the number of titles released in anticipation of the shift to the next generation of consoles. The company released 60 titles in 2009 and 54 in 2010. Since then, it has cut down on the number of titles released, with just 36 in 2011 and 22 in 2012. The company plans to release just 13 titles in 2013 to allow for a smooth transition to the new consoles.
Despite the decline in overall sales volumes, top selling franchises like EA’s FIFA and Battlefield and Activision Blizzard’s (ATVI) Call of Duty are performing better than ever, indicating that gamers have by no means given up on their habits. With the launch of the Playstation 4 and the next X-Box, we can anticipate an increase in the number of titles released by developers, leading to an increase in sales. GameStop already has over 900,000 members on its PlayStation 4 First to Know List and expects strong sales of the console.
Digital Sales To Remain Strong
GameStop’s digital sales have grown at a CAGR of 48% over the last two years, surpassing $630 million in 2012. This has been largely due to the growth of downloadable content (DLC), which has increased the revenue per title earned by developers. EA earned $60 million per title in 2010, but the figure went up to $107 million per title in 2011 and further to $180 million per title in 2012.
GameStop provides DLC in-store and online, offering its customers PowerUp points for transactions that can later be traded in for more games, accessories or DLC. The retailer has so far been able to implement its swap-shop business model to benefit from this digital revolution, but the development of in-house digital sales platforms like EA’s Origin might hurt the company in the coming years. We will keep a close eye on digital sales this quarter.
Disclosure: No positions.