Game Over for GameStop?

GameStop (NYSE: GME  ) probably doesn't see Toys "R" Us as much of a competitor in video game retailing, but that is about to change.

Toys "R" Us is starting to buy and resell used games in a few test stores, according to Forbes. If the program rolls out nationally, it would eat into GameStop's sweet spot as the definitive hub for swapping old games and gear for in-store credit.

Unlike most retailers, GameStop was rocking this past quarter. The company posted an impressive 10.2% gain in comps during the holidays. GameStop's success is the result of not only a healthy video game market but also the company's vibrant resale business.

Margins on new hardware are lousy. Margins on new software are better. However, GameStop's thickest margins come from buying back old titles and selling them again at roughly twice the price. It's a great model for GameStop, especially since it cuts out the developers and the royalties that developers have to pay out to Nintendo (OTC BB: NTDOY.PK), Microsoft (Nasdaq: MSFT  ) , and Sony (NYSE: SNE  ) .

GameStop's resale business also coated the company in recession-resistant Teflon. It can be seen as a pawnshop for teens, when you think about it.

Obviously, Toys "R" Us draws a much different audience than GameStop. Having spent more than enough time at both stores, I realize that diehard teen gamers at GameStop wouldn't be caught dead among the mothers with young children walking the video game aisles at Toys "R" Us. However, I trust that Toys "R" Us isn't stupid. If it either offers sellers better resale prices or marks down its used titles more aggressively, the same fickle teens that buy used games at GameStop because it's a better deal than shrink-wrapped titles will gravitate to where the deals are. One way or another, GameStop is going to have to keep its markups in check.

This comes at a tough time for GameStop, as retailers like Amazon.com (Nasdaq: AMZN  ) are selling game downloads, and software companies like Take-Two Interactive (Nasdaq: TTWO  ) are delivering games directly into consoles.

Given GameStop's trend-bucking health lately, shareholders may feel confident in ignoring the assaults coming from all sides. However, as a diehard gamer will tell you, overconfidence can be a game-ender.

Shall we play a game, Fool?

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive is a Motley Fool Rule Breakers recommendation. Nintendo, GameStop, and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2009, at 1:45 PM, TurtlePerson2 wrote:

    I don't think that Toys R' Us will try to give a better price for games. Also, Toys R' Us can't really sell M rated games. This looks like a way for Toys R' Us to try to convince parents that games are a better value and I'd expect that as the program is made more clear and advertised we'll see that there's no intention of buying used games from 18 year old kids. GME's market is threatened more by direct competition than from this new Toys R' Us plan.

  • Report this Comment On March 04, 2009, at 3:25 PM, mikecart1 wrote:

    GME is not going anywhere. When I was in there for Christmas shopping, it was packed. This was also on a Tuesday night 1 week before Christmas during sub-freezing weather, and every place around it was empty. Basically the parking lot was full of GME shoppers. I see GME only gettting stronger since gamer's have no intention usually of spending $50+ for a new game and would rather split that $50 into 2-3 games for the same exact entertainment value.

  • Report this Comment On March 04, 2009, at 6:31 PM, bccm17 wrote:

    Right after GME was spun-off, I found my "taxi" taking my pre-teen son to GameStop frequently. Weeks later I bought in and have held it as main-stay of portfolio.

    This afternoon I told my now teenager that Toys R Us is going after GME's market with used games, and he reminded me of "...what self-respecting teen would step foot into a Toys R Us".

    Like the initial investment, I am sticking with GME.

  • Report this Comment On March 05, 2009, at 10:07 AM, gamehead wrote:

    I remember blockbuster being a threat, I remember FYE coming in to the used business, and didnt Best Buy try the used business too? GME still dominates! Let what ever retailer try, GME is the only ones that can get it right!

  • Report this Comment On March 05, 2009, at 12:23 PM, ChiefDLW wrote:

    GameStop is more than a video game store. Every time I've gone into one, I've been amazed by the experience and knowledge of the salespeople, many gamers themselves. None of the "threats" can duplicate that level of expertise and service. I don't currently own GME, but it provided some excellent profits in the past and am just waiting for the overall market to show some strength before I wade back in. It will definitely be a future purchase. BTW, have you ever tried to find a salesperson in a Toys R'Us?

  • Report this Comment On March 05, 2009, at 12:50 PM, isa264 wrote:

    GameStop has been a victim to the failing economy eventhough their profits have increased. This article written by Motley Fool is complete hogwash! It is this kind of speculation that brings about selling of great stocks and and increase in consumer expenses (Oil reserve speculation).

    Gamers like to shop at GameStop because of the expertise of the employees, most of who are gamers themselves. Has anyone ever been to one of the midnight launches?

    I cannot remember the last time I was in a Toys-R-Us.

  • Report this Comment On March 05, 2009, at 1:01 PM, wengem wrote:

    Toys R Us has 600 stores in the US. GameStop has 6000 stores worldwide and probably a few thousand in the US alone. Which one do you think is going to be more convenient? Which one already has the used game inventory? The only way this isn't a complete failure for Toys R Us is if they significantly slash the margins on this to give gamers a *much* better value than GameStop does. And if they do that, then what's the point? The juicy margins are the point of reselling used games.

  • Report this Comment On March 05, 2009, at 1:23 PM, rainborick wrote:

    Whatever threat Toys-R-Us poses to GameStop, it's certainly compounded by Amazon's getting into the used game business. Amazon may only be doing this as a trial, but they would be more directly competitive to GameStop than TRU because of their built-in infrastructure and promotional capabilities.

  • Report this Comment On March 05, 2009, at 1:35 PM, Gamerfool1 wrote:

    Amazon WILL hurt Gamestop. *****This is the bigger press release.***** Amazon tests new projects for months before releases. This is no test. Amazon will be a driving force. Amazon is number 3 in Video Games in the country and will be propelled by being able to compete directly with GameStop. They are offering buy prices higher than GameStop for used games. Amazon has the advertising power and Gaming market reach to make a big impact. Watch out GameStop, here they come!!!!!!

  • Report this Comment On March 05, 2009, at 1:51 PM, isa264 wrote:

    It takes how long for delivery of games? It takes how long to get money for trade-ins?

  • Report this Comment On March 05, 2009, at 2:04 PM, isa264 wrote:

    Amazon.com does not accept gaming systems for trade-in only games! I traded in a bunch of old games and an old X-Box at GameStop. With the money I received for the stuff I traded + $20 I bought a WII Console, that SAME DAY! I did not have to wait for the games to be evaluated at corporate for their value.

  • Report this Comment On March 05, 2009, at 3:20 PM, scarabic wrote:

    I am not a GameStop shareholder but I am a customer.

    I love GameStop because they employ helpful and knowledgeable staff. Some of the best retail experiences I've had in recent years have been at GameStop. I'm a very big online shopper and a fan of Amazon, but GameStop is one of the brick-and-mortar stores I will leave the house to shop in. Excellent people and good service are a durable advantage, especially in an area like gaming, where customer questions abound. Is the Guitar Hero drum set compatible with my Rock Band downloaded songs? They know the answers and are super helpful.

    ToysRUs? When's the last time someone was happy with their service? Aren't they notoriously bad?

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