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THQ Rises on Game Sales Speculation

By Perry Rod, Published: November 22nd, 2010 5:36 AM CST

[UPDATE 11/23/2010: THQ Inc. has this morning released a press release stating that uDraw is, "Already among the top-selling Wii titles at online retailer"  This may suggest that what this article confirms - that the title is not a top-selling title at other retailers.]

THQ Inc. (NASDAQ:THQI) has risen over 20% on what appears to be excitement over their new game offering, uDraw for the Wii, which rose to Amazon's top 10 as the #2 title on the Wii since its November 16 release.  Over the years, investors have increasingly relied on charts to provide them with an idea of how new video games are performing.  THQ admitted during their last conference call that their third quarter relied heavily on uDraw's performance calling it one of two "key titles" for the holiday (the other being WWE titles).  However, hitting the top 10 in Amazon's chart might be a breakthrough.

Or it might not.

In an article to about the game’s Amazon sales performance, video game analyst Michael Pachter stated:

"The only thing that will hold uDraw back is supply, as the company said it intends to make only 1 million or so this fiscal year. If it's sold out, I'm sure they will find a way to increase manufacturing capacity."

Perhaps he shouldn’t be so sure.

At their recent quarterly conference call, THQ stated that they had already increased guidance for uDraw from 1 million to 1.25 to 1.3 million for their fiscal year ending in March, 2011.  THQ’s Chief Financial Officer, Paul Pucino, stated just last week before uDraw’s launch at a Wells Fargo (WFC) broadcast that the only thing holding back higher shipments were “supply constraints” because “clearly, demand is there.”  He went into further detail emphasizing that only half of those shipments would make the holiday quarter, “primarily because that’s the way the manufacturing of the units is going to roll’s just the way the supply is being delivered to us.”  The other half is scheduled for Europe in the following March quarter.

In other words, THQ management stated that for the crucial holiday quarter, THQ will be unable to ship more than 625-650 thousand units of the product to retailers in North America due to manufacturing limitations.  In the world of packaged video games, a shipment of 650 thousand for the holiday quarter is a very small number.

Calling around a dozen various GameStops (NYSE:GME) across the country, there seemed to be less sales interest in the title than an Amazon bestseller would seem to suggest.  In fact, not one store employee in the sample listed uDraw as a top selling new Wii title.  Store employees did, however, mention that they received small allocations and expected them to be a  popular gift through the holiday.  Similar situations at a local Wal-Mart (NYSE:WMT) and Best Buy (NYSE:BBY) were observed in Los Angeles, where only a few copies of the product were received.  A quick check around the internet suggests that some online retailers like and likely received an even smaller allocation of the product, since they have sold out of the product and yet the item does not show up prominently on their bestseller lists.  Those quick sellouts may be what pushed uDraw up Amazon’s bestseller chart, since buyers online have limited options.

Looking back at the Amazon chart, in the entire month of October 2010, Ubisoft's Just Dance 2 ranked at number 7 on their overall bestseller chart.  Yet, it sold around 286,000 copies according to NPD.  That's not bad but it is not groundbreaking if that type of number were to apply to a new release.  On Amazon, the top selling Wii title continues to be Just Dance 2, suggesting uDraw may be selling less than that title.  When combined with the shortages, uDraw sales do not seem to be as impressive as an Amazon bestseller list would normally suggest.

It is certainly not bad news that THQ’s small initial shipments of uDraw to retailers are performing well.  They certainly need a winner at this point.  uDraw may continue to be a good seller for another year once supply constraints are relieved well past this holiday and into 2011.  But investors and analysts looking for any kind of significant impact on earnings in the next two quarters from uDraw are in for disappointment based on management’s guidance.

Disclosure: author has opened a short position in THQ


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