Update: Physical Game Sales Declining; Bear Thesis On GameStop Playing Out

Aug.15.14 | About: GameStop Corp. (GME)

Summary

NPD Group announced that video game sales in physical retailers fell 15% y/y.

This negative industry data cements my conviction that GameStop will falter.

In my previous article, I predicted that video game sales would shift to digital downloads.

NPD Group recently announced that video game sales in physical retailers fell 15% y/y in July. Moreover, the report stated that total hardware sales in July were double that figure in 2013. Hardware spending during July totaled $198.8 million, up from $99.4 million in July 2013. Therefore, there is a clear divergence between hardware and software sales, which leads investors to discern that video game sales are migrating towards digital downloads through consoles.

The NPD report discounts the decline in July, by stating the figure was negatively impacted because the NCAA Football game that usually launches in July is no longer produced, due to a dispute between Electronic Arts (NASDAQ:EA) and the NCAA. However, this excuse cannot account for this precipitous decline. Moreover, the tremendous increase in console sales, which buoys game sales, should have more than offset this impact. The conclusion one can reach from this development is that game sales are rapidly shifting to digital downloads.

In my previous article, "GameStop: The Industry Is Leaving It In The Rear View Mirror," I opined that GameStop would falter, as game developers are bypassing them to sell directly to consumers. This trend towards digital downloads paints a grim outlook for GameStop (NYSE:GME). An influx of console sales will not offset the decline in physical game sales, as margins for consoles are a paltry 10%, compared to game margins north of 20%. GameStop faces serious headwinds, as the market cuts them out.

Disclosure: The author is short GME. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. I am short via LEAP Put options.