GameStop Corp (GME) is the world’s largest multi-channel video game retailer, selling new and used video game hardware, software, accessories and new and used mobile and other consumer electronic products. At the end of 2013, GameStop had a network of 6,675 company-operated stores in the U.S., Australia, Canada and Europe, various branded websites and a game focused magazine, GameInformer.
The new video game industry has recently faced a decline with NPD reporting total industry sales down 2% in 2013 to $12.97 billion, with gaming hardware sales increasing 5% to $4.26 billion, offset by declining software sales of 9% to $6.12 billion and accessories up 3% to $2.6 billion. When combined with the sale of digital and used games, gaming content sales only increased 1% from 2012 to $15.39 billion in 2013.
Among waning industry sales and a growing shift to digital distribution of games, GameStop’s strategy is to extend its core competency with the buy-sell-trade retail model to other retail products and categories. In executing its strategy, GameStop has primarily targeted the mobile device and telecommunications retail market with the acquisitions of SpringMobile in November 2013 and the launch of Aio Wireless, a prepaid wireless retail store concept, in the fourth quarter of 2013. These acquisitions are in addition to an acquisition in 2012 of SimplyMac, a chain of Apple specialty retail stores.
In addition to GameStop broadening its retail model to include products and services outside of gaming, GameStop has also sought to drive long-term shareholder value by increasing cash dividends and stock buy-backs.
GME – Earnings Summary
GameStop started 2014 in a downward trend, cutting fourth-quarter earnings estimates for the period ending Feb. 1 in Jan. from already lowered levels. In Mar., GameStop reported full-year sales ended Feb. 1 of $3.68 billion, up 3.4% from the previous year but below analyst projections of $3.79 billion. Same stores sales increased 7.8%, but GameStop continued to struggle with competition from cheaper mobile games and lower industry videogame sales, outlining plans to close 2% of stores and shuttering its streaming game service, Spawn Labs.
GameStop’s first fiscal quarter set forth a more upbeat story with earnings increasing 25% on the demand for the new gaming systems, Xbox One and PlayStation 4. Total revenue for the quarter increased 7% to $2 billion, with sales in the hardware category increase 81.1% to $438 million and used game sales increasing 5.3%, offset by a 20% decline in software sales due to fewer new game launches than last year. Earnings were also up, increasing to $68 million from $54.6 million the same period last year.
Second quarter continued the trend with GameStop reporting a sales increase of 25% to $1.73 billion with same store sales increasing 21.9%, driven by new hardware sales and game sales increasing 16% on demand for several new hot game releases. Earnings were $24.6 million compared to last year of $10.5 million as increases in used game sales, which have higher margins than new games, also helped the bottom line.
GME – 92% Return in 2013 is Hard to Beat
GameStop had a great 2013, with GME stock price growing from $24.36 to $49.27, up 92% for the year. GameStop’s gain was despite a significant correction in Nov. 2013 caused by GameStop’s announcement that fourth-quarter earnings would not meet analyst expectations. 2014 has been a different story with GME stock seeing only modest increases based on improved fundamentals on an overall down year.
GameStop is highly dependent upon the roll out of new games and new gaming consoles. In addition, several gaming development companies are looking to circumvent GameStop’s distribution in favor of cheaper digital distribution. This has yet to catch on, but as the U.S. and the world has moved to increased mobility and gotten comfortable accessing software via the cloud, look for higher penetration of this type of gaming delivery system.
With a dividend yield of 3.2%, GameStop has had several years of consecutive dividend increases and had significant capital appreciation last year. The trailing twelve months dividend payout ratio of 37% leaves plenty of room for growth in both the dividend as well as reinvestment into the business.
GameStop’s price-to-earnings ratio of 11.9 is significantly below the S&P 500’s 18.4 price-to-earnings ratio, and with a price/earnings-to-growth ratio of 0.66, GameStop appears to be a good value. Analysts have a 12-month, consensus price target of $52 a share, which, given its current trading levels, would offer nice capital appreciation next year as well.
With such high reliance on new games and gaming consoles to drive sales and the intermittency in which each are performed, coupled with GameStop’s diversification strategy still in its infancy, I would be hard pressed to recommend GameStop to any serious, long-term dividend investor. GameStop does offer a great growth and income play for investors that are willing to monitor the stock and adjust holdings accordingly in order to take risk off the table if needed.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
