Gamestop: Signs of slowing demand
Posted
May 16 2008, 12:09 PM
by
Andrew Horowitz
Rating:
After the recent merger with EB Games, GameStop is by far the No. 1 specialty retailer that focuses on the new and used video game market. The company has a total of 4,400 active stores in virtually every state and in 15 countries.
Revenue has been on the rise as the hot gaming market continues to grow exponentially. The latest editions of Rock Band, Guitar Hero, Halo 3 and the blockbuster Grand Theft Auto IV are all extraordinarily popular on every gaming platform.
But how will Gamestop continue to thrive in the face of significant competition from discount retailers such as Target and Wal-Mart? What’s more, the bulk-retailers are also selling video games in a time when many shoppers are looking for alternatives to save money as the economy softens. As it has shown to be a significant money maker, more retailers are looking to sell as a means to attract shoppers and to profit from the excellent margins.
Sales and EPS growth has been nothing but spectacular as video gaming has reach all-time popularity with players. Online, offline or any-line, the draw of the interactivity and the superb graphics along with compelling storyline has created a booming industry. But, perhaps it is time to consider taking some profits or even looking to sell short the name in light of some very real competitive concerns.
Intuitively, as consumer sentiment wanes (now down to a 28-year low of $59) alternative shopping patterns will emerge. This means that the traditional shopping mall should see a significant decline in traffic and corresponding traffic to the bulk retailers will increase. This can be seen by the recent sales results of Costco, BJ’s and Wal-Mart as compared to Radio Shack, Sears and the now bankrupt Sharper Image.
In January, shares traded at $62 and have been on a wild ride of their own, then dipping as much as 50% into March. Since the low on March 3rd, shares have been rising with the markets and the anticipation of the latest game releases, moving it up towards $55.
With that backdrop and the reality that there is limited magic in the developmental pipeline, it is looking like it may be time to consider some taking profits or entering a short position on this name. Remember, it is still a retail operation and one that could be consider highly discretionary. Gamers are smart, they will trade, borrow or purchase used games from friends, trading store or even auction sites if money is tight.
On May 16th, Barron’s reported on the NPD Research release:
- Activision’s (ATVI) sell through was down 11.5% in the month
- Electronic Arts (ERTS) had a 74.4% increase in sell through to $65.8 million, but below the 160% gain forecast.
- THQ (THQI) sell through was up 10.6% to $14.7 million again below the NPD gain of 65%.
- Take-Two (TTWO) had a 919.4% increase in sell through to $199.6 million, thanks to the debut late in the month of Grand Theft Auto IV, although NPD analysts had expected 1,280% growth.
Perhaps the slowing sales is a foreshadowing of what is to come for Gamestop and the recent downward bias since mid-April is giving investors some advanced warning. This is a significant change of opinion, since as of May 2007 we were bullish on the stock as growth and fundamentals were strong. Now, we are nipping at the short side starting at $54 and will set up a top-end stop at $56. Overall, if the economy continues to struggle, this name could see a downside move towards $48 rather quickly.
Additional reading:
No Stopping Gamestop
How much for video gaming's bad boy?
Nintendo's Wii a surprise hit with seniors
Disclosure: Horowitz & Company clients may hold SHORT positions in securities mentioned as of the publish date.
