Latest Articles:


GameStop - The Barbell Company

By Joe Matty, Published: December 10th, 2009 10:07 AM CST

Many have observed that NPD data has not necessarily been indicative of GameStop Corp. (NYSE:GME) performance. I happen to agree based on the Barbell Theory.

GameStop has two big earnings drivers going for it that allow it to outperform a weak or relatively weak software sector:

1. Used Games. On the low end they have a very successful and dominant used game business that accounts for almost half of their profits. And to boot, this business is growing and is counter cyclical outperforming in weak financial times.

2. New Games/Launches. On the full price, high end of the spectrum they have significant market share of the new game market. And, yes, they are taking share on the full price launches as well. For example, by some estimates they sold close to 50% of Activision Blizzard's (NASDAQ:ATVI) Modern Warfare 2 at launch, or 2.5 million copies.

So what is in the middle of the barbell?
The middle is long but narrow, where all the weak selling games lie, whether duds or back catalog sales. This is where the industry is suffering particularly hard, and luckily for GME stockholders they are buffeted to a great degree by the two large bulges on each side of the barbell (used + AAA new games).

In fact, it is likely that GameStop is contributing somewhat to the overall weakness in catalog sales. Let's see, we know GameStop's used business has grown at a 20% clip this year. We know they have perfected and significantly increased their penetration of the buy-sell-trade model. The model works because gamers have learned to trade their old unwanted and unused games towards credit for either a new game or another old game. For example, about 20% of the purchase price of Modern Warfare 2 was paid for by trade credits. Its hard to believe this "repurposing" or "recycling" of games would not have an affect on new game sales. Perhaps not the best news for software companies, but for GameStop it's almost too good to be true. But it is true and investors seem to ignore or misunderstand GameStop's business model, at their own peril.

What about the sales shortfall of music software - is that hurting GameStop?

Yes, the sales of music based games have missed estimates by a huge amount this year. It definitely hurts revenue and profits as these kind of games had a particularly high price point (particularly the ones bundled with instruments). By some analyst accounts the shortfall in this one subsector accounts for most of the shortfall in sales this year.

But, and this is a big but, this shortfall is not new, it should be fully factored in management's Q4 guidance. Remember, management INCREASED guidance to a range of $2.45 - $2.65 on their Q3 earnings call on November 19th. By the way, these would be record earnings. Management already knew the music influenced games were very weak as most had been launched prior to the earnings call. In fact, during the call, management emphasized confidence in Q4 based on the four monster AAA titles of the quarter: MW2, Assassin's Creed 2, Electronic Art's (NASDAQ:ERTS) Left 4 Dead 2, and Super Mario Brothers. I don't think they were counting on much support from the music games, and I certainly don't think they will miss estimates based on those either.

In conclusion, despite relatively weak NPD numbers this past year, GME, the barbell company, has and could continue to still meet its earnings target or even beat them.

Disclosure: author is long shares of Gamestop Corp.

Related: GME

Bookmark and Share

Article Replies

Related Articles


Are We Wrong on GME?


THQ Rises on Game Sales Speculation


Michael Pachter Overestimates, Take Two Interac...

Newest Articles


Freelance Journalist Sends Twitter Stock Soaring


Take Two and Video Game Makers Report With New ...


YouTube Ad Guy Tai Lopez Caught Lying, Possibly...

Copyright 2014 All Rights Reserved; Patent Pending