GameStop (NYSE:GME) shares may not be at their lofty levels of 2008, but the stock touched another new 52-week high of $28 on Friday, a jump of 20% in the past two months alone, thanks to two straight quarters of solid earnings. With two of the company’s segments, namely digital and used game sales, seeing big gains in the first quarter of 2011, does this mean that GameStop is on the mend for good?
The company said Thursday that sales in its latest quarter rose nearly 10%, but the best news was that both digital game sales, a sector GameStop has worked hard to grow in the past twelve months, and used game sales, always the source of the company’s greatest profits, were well up in the quarter. Digital sales through its businesses like the gaming website Kongregate.com rose 53%, while used product sales, a segment that saw declines in 2010, were up 9.5% and accounted for half the company’s gross profit.
Even though GameStop expects the current quarter to remain flat vs. the period just reported, its future looks promising. While the company’s efforts in the digital arena are still developing slowly, they’re still growing at pace that should help GameStop replace revenue lost on the small number of customers turning away from physical products to downloadable ones. GameStop earned $290 million from its digital businesses in 2010, a 61% increase over 2009. As long as it can keep its current rate of quarterly growth at 53% or more, digital business will finally be a vital earner for the company rather than a segment the company pours money into with no returns.
The rebound in used product sales is equally promising. GameStop also highlighted strong game console sales for the quarter, from both Sony (NYSE:SNE) and Microsoft’s (NASDAQ:MSFT) Playstation and Xbox devices as well as Nintendo’s (PINK:NTDOY) new portable 3DS.
The influx of new console owners looking for cheap software, especially going into the summer season when new game releases are scarce, means that GameStop’s used product sales should stay brisk well into the holiday quarter. Sony and Nintendo are both expected to introduce new consoles next month as well. Since both rely on physical media purchased at stores rather than purely downloadable games, that’s a strong promise of good used game sales well into 2012 as well.
Whether GameStop will reach $50 again remains to be seen. But it looks like the retailer is finding ways to survive in a market that has changed a great deal in a short span of time. That’s good news for shareholders.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
