Is GameStop the Next Best Buy?

There's one fewer Wall Street believer in GameStop (NYSE: GME  ) .

Needham analyst Sean McGowan downgraded shares of the video game retailer yesterday.

It's odd that McGowan waited three weeks after the company's bleak fiscal fourth-quarter report to move the stock from buy to hold, taking down his revenue and profit targets over the next years. Shouldn't the weakness have been apparent then?

It's obviously not as simple as watching Best Buy's (NYSE: BBY  ) upheaval this week and just going one name lower on the corporate death pool, though there are similarities between Best Buy and GameStop. Best Buy is looking to close 50 superstores this year. GameStop is also looking to close out this year with 50 fewer stores. Both chains have seen historically robust comparable-store sales turn negative.

However, at least GameStop has responded somewhat effectively to the crisis. GameStop's trade-in business and PowerUp Rewards loyalty shopping program have helped keep customers close in a world where lower prices are a click away.

In the end, it won't matter. Both Best Buy and GameStop are doomed. It's just a matter of which one is rearranging the deck chairs the nicest at this point.

McGowan sees revenue falling to $9.4 billion this fiscal year. Until yesterday his projection was for GameStop's top line to grow from $9.55 billion to $9.89 billion. He's also slashing next year's revenue forecast -- from $10.1 billion to $9.625 billion -- but at least that implies growth. McGowan is slashing his profit estimates for this year, but moving them higher for next year despite slashing his revenue outlook. The chain has been buying back a ton of shares to keep its earnings buoyant on a per-share basis.

Optimists used to believe that Nintendo's (OTC: NTDOY) new Wii U console would reignite interest in an industry that has been sliding for most of the past three years, but McGowan doesn't feel that the Wii U -- or the new Xbox and PlayStation consoles that should follow next year -- will generate the boost that earlier generations have delivered.

Even if they do, the emphasis on digital delivery for software distribution in the next generation of gaming systems will sting GameStop in terms of both initial sales and its still-thriving resale business.

McGowan may be late to the party. GameStop has dropped plenty of clues, including slashing its same-store sales target three times over the past year. However, it's better to be late and right than early and wrong.

Digital future
Even though the next trillion-dollar revolution will be in mobile, it may not involve GameStop's digital initiatives. A free special report will get you up to speed.

Motley Fool newsletter services have recommended buying shares of Nintendo. Motley Fool newsletter services have recommended writing covered calls on GameStop. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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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 April 12, 2012, at 12:11 PM, DJDynamicNC wrote:

    The death of retail continues apace. Gamestop is facing the same fate as Blockbuster, and for the same reasons.

    I expect a few local video game stores to hang on by cultivating the same sort of audience that those few thriving local bookstores and video rental shops cultivate, building a "third place" environment for people and capitalizing on a lean internet-based supply chain. Big box retail can't compete on atmosphere (though Barnes and Noble is certainly trying) and can no longer compete on price given the omnipresence of the internet, so there isn't much left for them except providing familiar experiences to people out of town. Which isn't enough to build a business.

  • Report this Comment On April 19, 2012, at 9:25 PM, skateryan wrote:

    I can understand the doubt of a gaming specialty store sticking around. The next generation has been full of rumors about an all digital generation of disc-free gaming via download or streaming. However, I don't think it's wise to count places like GameStop out.

    I expect GameStop to make a nice recovery when the next generation of consoles surface. GameStop is always the first place people go for new hardware and games. So, even if the next Xbox or PlayStation go all digital for their games, GameStop can still sell hardware and even DLC cards for people who don't have credit cards or don't feel safe using theirs online for game purchases. However, I honestly don't expect the upcoming generation to be the first all digital generation. From a market standpoint, the hardware developers would be alienating too many customers. While we do have the ability to download games now, the majority of our new titles are purchased on discs. Unless a major breakthrough in internet speeds and pricing come along soon, it would be a huge inconvenience to download full length, big budget games instead of buying them at a store. When we're done with a game, and we want a new one, we don't want to wait several hours before we can play it. As long as there are physical copies of video games, GameStop will be around.

    As far as the gaming industry "sliding for most of the past three years" is concerned, I would like for you to look at the history of our beloved industry. Our console generations last roughly 5-6 years each. At the beginning of these generations, sales jump directly after release through the next 2-3 years. Then, as the number of people who don't own a console grows smaller, and the release of new games becomes lighter to make way for the next generation, we see that "slide" he was talking about. This generation is one of the longest we have seen, and will see. While the Wii U is coming out later this year, the other big name companies are claiming that they don't even have anything to show at this year's Electronic Entertainment Expo (E3). Most are speculating a 2014 release date for the next outings of Xbox and PlayStation. So, we're likely looking at an 8 year cycle. Which means there is likely going to be a longer period of weakened sales due to fewer new games and the lack of new hardware. When you add the recent economic downturn into the picture, it's understandable that the gaming industry is taking a hit.

    As the economy rebounds and new games are released aside new consoles, we will see a jump in sales. As far as GameStop is concerned, it may only be a matter of time before it is left behind for the all digital generation. However, I doubt that will happen anytime in the near future.

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