The other day I had occasion to go to the mall as I was in need of something "resort casual" for an event I’m attending this weekend. I was not five steps inside the large department store when I noticed the Christmas decorations were being set up for display by store employees.
Gee, I thought to myself, here it is a good five weeks from Halloween and the Christmas décor is out. I couldn’t believe it. Pretty soon we’ll be seeing the holiday season start in mid-July!
In any event, the shock of seeing the holiday display got me thinking—Christmas is right around the corner. Given the tough economic conditions and trade groups expecting lackluster results, where will the consumer be allocating his or her ever-dwindling dollar?
My thinking is that parents will spend less on themselves and more on their kids. That means one of the winners this season will be video games. Games are a cheap diversion, and there are plenty of reasons one might want to be diverted this season. (See also: "Best Buy (BBY) to the Rescue?" and "Four Consumer Durables to Buy Now.")
It’s ugly out there.
Of the names to look at in the video game space is retailer, GameStop Corp. (GME). They are one of the largest one-stop shops for video games with over 5,000 stores, and they offer everything for the video game enthusiast.
This includes new and used video game hardware, software and accessories, including controllers, memory cards and other add-ons; PC entertainment and other software and PC entertainment accessories such as joysticks; and strategy guides and magazines, as well as trading cards.
Video games as everybody knows, have become one of our great pastimes, and some of the world’s great companies are heavily involved in producing or making the platforms for them, such as Sony and Microsoft. Games run the gamut from children’s offerings to more adult oriented offerings to sports-related games.
The Nintendo Wii was a must-have product when it was introduced, and customers lined up for hours to get theirs. GME was their destination.
The stock market has punished, for good reason, the shares of most companies that rely on the consumer. I get it, but these sweeping moves to the downside include some interesting companies that may still do well even during a downturn. (For more retail stocks set to profit, check out: "Pacific Sunwear (PSUN): A Great Buying Opportunity" and "Retails Steals.")
GME has produced great results of late and their outlook is bright, too. In its second quarter (ended 8/2/08) the company beat the high-end of its previously released guidance by 6 cents per share and exceeded the year ago quarter’s net earnings by 162 percent. Comparable store sales grew by 20 percent as new video game software sales grew 43 percent.
In the second quarter GME produced record revenues in each geographic area in which it operates. Management believes it will continue to deliver superior returns to shareholders as it drives value through its new and used business model and new store expansion.
The company raised full-year earnings guidance to $2.45 to $2.50 per share which is a 36 to 39 percent year-over-year increase. It believes full-year fiscal 2009 earnings will grow at least 25 percent from fiscal 2008 as a great new title line-up will drive new video game software sales to double-digit growth.
GME trades for just 11.5 times fiscal ’09 estimates despite its impressive growth rate and for just 73 percent of sales.
Yes, the consumer has been weakened, but for those looking for winners during this downturn you might want to consider GME.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
