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Will Lawsuits Hurt GameStop's Share Price?

|Includes:BBY, Electronic Arts Inc. (EA), GME, TGT, WMT

By Louis Bedigian

Used game complaints and personal info recording have cast a dark shadow on the world's largest retailer of video games. But are they enough to hurt the company's share price?

GameStop Corp. (NYSE:GME) is no stranger to lawsuits. In 2006, a handful of store managers sued the company, claiming that they did not actually manage anything and should have been eligible for overtime pay.

Four years later, the retail giant was sued once more, this time for the sale of used games.

As every investor should know, used games are the company's bread and butter. But game publishers have long argued that they do not profit from the sale of used software. Thus, Electronic Arts (ERTS) decided to lock down its online content, offering a free code to those who purchased a new copies of its games, but requiring used buyers (who will not have the code) to pay $10 to $15 extra – per game – to play them online. That way, EA would theoretically profit no matter how the game was acquired.

The 2010 lawsuit alleges that GameStop failed to properly educate consumers on the matter. While it is not any retailer's job to inform us of EA's evolving business strategy, the problem is that EA advertises all of its game features on the box – the same box that winds up on GameStop shelves. One could argue that the merchant is guilty of not updating the box with a notice that says, “Hey, consumer! This used copy is only half-full!”

Since GameStop failed to do so, angry customers have now filed a class-action suit against the firm. The suit, which was filed last week, claims that the company is being deceptive in the way that it sells used games.

Last month, a woman in Alameda County, California, filed a different class-action suit against the retailer. The woman claims that GameStop illegally recorded her name, credit card number, and personal identification information during a recent shopping trip.

Should the latter claims prove to be true, all GameStop can do is confess, vow to change its practices, and fight to regain the trust of its customers. But while dedicated game buyers might be willing to forgive and forget, the company could have a hard time maintaining the trust of the all-important demographic that it stole from Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Best Buy (NYSE:BBY) and Toys ‘R' Us: parents. If parents pack up and leave, GameStop's profits will fall – and so will the stock.

On the upside, most GameStop shoppers are clueless about what goes on in the video game industry. Chances are they have not heard about any of these lawsuits, and they probably never will.

That doesn't mean that GameStop's shares are safe. But unless one or both of these class-action suits head to court, the media blitz will be minimal, and business will continue as usual.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: EA, BBY, TGT, WMT, GME