GameStop (NASDAQ: GME) is dreaming of a white Christmas, one in which American consumers role out in droves to spend big on coveted items like Microsoft‘s (NASDAQ: MSFT) Kinect for the Xbox 360, Sony‘s (NYSE: SNE) Move for Playstation 3, and maybe even one of those Nintendo (PINK: NTDOY) Wii things that every seemed so crazy about just a year back. More than that though, Gamestop wants people buying used games by the bucket load. They need it after two straight quarters of major declines and a number of confused attempts across the last six months to realign their business model for an industry whose revenues are increasingly coming from intangible goods. The game retailer has taken hits throughout the year starting back in June when shares dropped to almost $18 per share, skating just above their three-year low of $17.12, after lowering their Q2 guidance. The company’s shown signs of recovery since, only to plummet back down each time.
Yesterday the company reported earnings for their third quarter, which ended on Oct. 30. GME did see some slight improvements between August and October, though not the kind that will have investors expecting a return to the company’s glory days in 2008. Total sales for the quarter increased +3.5% year-on-year, up to $1.9 billion, bringing total sales for 2010 up to 6.4 billion. Net earnings also saw a meager year-on-year increase, up to $54.7 million compared to $52.2 million in 2009.
Software, specifically new software, drove sales for GameStop in the early fall quarter. Take-Two Interactive‘s (NASDAQ: TTWO) NBA 2K11, Electronic Arts‘ (NASDAQ: ERTS) Medal of Honor, Microsoft’s Halo: Reach, and Zenimax and Bethesda’s Fallout: New Vegas, all titles targeted at the enthusiast market rather than the family-friendly casual market that has accounted for so much of the company’s revenue in recent years, were highlighted as sales drivers during the period. It should also be noted that all of those titles were released in October save Microsoft’s Halo, highlighting the overall weakness of late summer software like Take-Two’s Mafia II.
Going into the holiday, GameStop is expecting the Kinect and Move to drive hardware sales. GME President Tony Bartel told investors that Sony and Microsoft’s new motion control devices are selling fast and that, in addition to moving hardware from both manufacturers, they are bringing “a new customer into our stores.” GameStop is banking on consumers weaned on the Wii’s motion control technology will be wooed into upgrading to high definition consoles thanks to Kinect and Move. While the new hardware, and November software like Activision Blizzard‘s (NASDAQ: ATVI) Call of Duty: Black Ops and Ubisoft’s Assassin’s Creed: Brotherhood will undoubtedly increase foot traffic in GameStop stores this holiday, it’s questionable if that will lead to resurgent used software sales. Used games account for 31.4% of GME’s revenue, so promising new hardware and new software sales are not exactly music to GME shareholders’ ears. We will know more about how GameStop will fare at the end of the fiscal year when the NPD Group reports November sales data in mid-December.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
