There's no stopping GameStop
Posted
Mar 06 2008, 04:39 PM
by
Robert Walberg
Not skyrocketing energy prices, not the rising foreclosure rate, not even the slowing U.S. economy will stop GameStop from posting monster sales and earnings gains when the company reports its fiscal fourth quarter earnings in less than two weeks.
Bolstered by strong demand for video game hardware systems such as the Wii and Xbox 360, and continued strength in software sales, the world's leading video game retailer is expected to deliver Q4 earnings of $1.12 per share on revenue of $2.9 billion, -- well above last year's results of 82 cents and $2.3 billion.
Normally, a stock would rally into such news. But these aren't normal times. GameStop is down 32% from its December 2007 high, as investors flee any and all stocks tied to the consumer. However, unless you're a gamer or are related to one, you might not understand that GameStop actually stands to benefit competitively from a downturn. Unlike Target, Best Buy or Wal-Mart, GameStop sells used games and game consoles. In fact, sales of pre-owned merchandise now represent about 25% of total sales.
With consumers being pinched by higher fuel prices, higher debt payments, higher food costs, etc., it's only logical to assume that more and more gamers might decide to save a few bucks and buy a pre-owned version of Madden 08, Grand Theft Auto or Super Mario Bros. Olympic Games (that is if they don't stop spending money on such items altogether). Of course, they can't do that at Best Buy but they can and will do so at GameStop. While prices on used merchandise is lower than on the new stuff, profit margins are more than twice as high.
Meanwhile, if you've ever visited one of their stores you know that demand for hardware and software remains sky high -- even with all the macroeconomic turbulence. The stores are routinely jammed and people are lining up to buy everything from the hard-to-find Wii to the next hot video game. How many stores to do you shop in where it's customary to have to wait weeks in order to get a copy of the new release items? If you thought it was difficult to find a pair of Uggs this winter, then you weren't one of those parents desperately trying to get a Wii during the holidays. Now gamers are lining up and signing up to get copies of the new Super Smash Bros. Brawl game due to be released this weekend.
I'm not sure what it says about society that so many kids and young adults are addicted to video games, and frankly it's not my job to care. It's my job to identify companies with competitive advantages that help them achieve better than market/industry sales and earnings growth. GameStop fits that description. Better yet, with the market in the midst of a major downturn the stock is now pretty darn cheap as its forward p/e of 19.7 is well below its projected growth rate of 24%. Assuming major support near $40 holds over the near-term, and that the company delivers on its earnings promise, look for GameStop to rebound to the low to mid-$50s over the next 9-12 months.
