What Will Stop GameStop Corp. (GME)?

Video game retailer GameStop Corp. (NYSE:GME) is down almost 20% over the past week. The big news driving the stock lower was that first-quarter net income fell 25% year-over-year. Yet, the company still managed to beat Wall Street expectations, posting EPS of $0.46 compared to analyst expectations of $0.40. GameStop Corp. (NYSE:GME) is still the largest U.S. video game and PC entertainment-software specialty retailer, with more than 6,500 stores worldwide.

Revenue for fiscal 2014 is expected to only be down 0.5% after a 7% fall in 2013. The key driver of the decline in revenue is slowing purchases of consoles and games as consumers await the release of next-generation devices. There are some concerns related to GameStop’s used-game business as new game consoles come to market, which could shift game revenue from retailers to manufacturers, significantly downsizing the used game market going forward. About 25% of GameStop Corp. (NYSE:GME)’s revenue is derived from pre-owned game sales.

However, GameStop is looking to hedge this decline with growth in its digital sales and mobile business. These initiatives include GameStop’s move to a mixed retailer of physical and digital gaming and electronics products. GameStop expects the North American market for digital mobile, social, console and PC games to grow from $7 billion in 2012 to $10 to $12 billion by 2015, a compound annual growth rate of 13% to 20%. This should be in part driven by the recent and upcoming hardware platform technology evolution from Nintendo, Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) over the next year or two.

Competition

Other notable brick-and-mortar retailers that are competing with GameStop Corp. (NYSE:GME) include RadioShack Corporation (NYSE:RSH) and Best Buy Co., Inc. (NYSE:BBY). RadioShack Corporation (NYSE:RSH) has been one of the hardest-hit retailers and is continuing to close under-performing stores to help hedge the demand deterioration it is seeing. The stock has garnered a lot of short interest as well, with 38% of its float short.

For 1Q, RadioShack posted a $0.35 loss on 5.7% lower same-store sales and 7% lower total sales. Going forward, the pressures still appear to be afoot, as the retailer ended its partnership with Target Corporation (NYSE:TGT) for providing mobile kiosks in its stores.

RadioShack Corporation (NYSE:RSH) is now looking to increase its exposure to the smartphone market, which will structurally pressure gross margins. However, the competition is rich there too, with Best Buy Co., Inc. (NYSE:BBY) breaking into the market. Best Buy has opened 525 Samsung Experience shops in its big-box stores nationwide and another 390 in its smaller Best Buy Mobile stores.

Best Buy posted EPS of $0.32 compared to $0.76 for the same period last year; this beat consensus forecasts of $0.26. The earnings beat has in part lifted Best Buy’s stock of late, yet, a bigger problem is contracting margins; gross margin contracted 60 basis points to 22.6% last quarter year-over-year, and operating margin was down 170 basis points to 5.5%.

Compared to GameStop Corp. (NYSE:GME), Best Buy Co., Inc. (NYSE:BBY) is on a tear year-to-date.

What Will Stop GameStop Corp. (GME)?

Published on June 3, 2013 at 1:03 pm by The Motley Fool in News

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