Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



GameStop Is Starting to Get Scary

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

GameStop (NYSE: GME  ) is in trouble.

The video game retailer posted disappointing quarterly results this morning, once again hosing down its same-store sales guidance for the entire fiscal year.

However, even GameStop's stronghold of pre-owned sales is starting to come undone. That's huge. Swapping used games and gear for store credit has traditionally been where the chain's chunkiest profit margins can be found.

The quarter was a dud. Sales fell 11% to $1.55 billion, shy of the $1.61 billion that Wall Street was expecting. It's hard to overcome a 9.3% slide in comps.

GameStop points to a weak slate of new releases slowing interest in die-hard gamers, but pre-owned sales actually plunged by an even steeper 11.2% during the period. Wasn't this supposed to be the recession-proof and cycle-proof element to the GameStop model? Isn't this why GameStop is showing off its refurbishing facility?

Yes, digital and mobile sales are growing, but we're talking about segments making up less than 9% and 2%, respectively, of the sinking retailer's sales mix.

GameStop's profit of $0.16 a share actually beat the $0.15 a share that analysts were targeting, but there's no way that it would've gotten there without aggressive share buybacks over the past year. Net income actually tumbled a grim 32% to $21 million. However, this is still the first time in a year that GameStop managed to post better-than-expected bottom-line results. It's a silver lining, but is it enough?

GameStop is sticking to its profit guidance, calling for a profit of $3.10 a share to $3.30 a share this year, but that's once again the handiwork of the company's aggressive buybacks. Same-store sales are now expected to fall by 2% to 10% this fiscal year. Just three months ago GameStop was eyeing comps to check in between flat and off by just 5%. Dive into the corporate archives, and you'll see a long string of quarterly downgrades on that front. Back in March, the company's outlook called for positive comps -- up 1% to 5% -- on the year.

Bulls will argue that GameStop's fortunes will change once Nintendo (OTC: NTDOY.PK) rolls out its new console later this year, inspiring Wii trade-ins and the purchases of new systems and titles, but GameStop's draw skews toward older gamers who prefer Microsoft's (Nasdaq: MSFT  ) Xbox 360 and Sony's (NYSE: SNE  ) PS3. Neither of those two companies is likely to introduce its next-generation platforms until 2014.

Who knows what the gaming world will look like by then? It's safe to say that all three console makers -- and software companies, too -- will be more interested in selling digital downloads, cutting out the physical retailers entirely.

GameStop's profitable, and it's certainly a cheap investment on an earnings basis. Its decision to begin paying a quarterly dividend gives the stock a meaty yield as its share price slips. However, none of this is sustainable if sales and net margins continue to contract.

GameStop may seem cheap now, but like its stash of unsold pre-owned gear it may not be worth that much in the future.

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.

The Motley Fool owns shares of Microsoft and GameStop. Motley Fool newsletter services have recommended buying shares of Microsoft. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a modified stock repair position in 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.

Read/Post Comments (2) | Recommend This Article (4)

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 August 19, 2012, at 10:19 PM, EquityBull wrote:

    Good piece. I dumped my GME at 21.50 awhile back. Got out a bit ahead as I had been writing call options against it and pocketing the premium for a few quarters.

    Saw this trend and realized it was NOT the DLC threat that was going to undo GME but instead the mobile trend, PC games and Facebook games. Tablets, phones and the like all diverting gamers attention away from console games. Saw it with my own son. Rarely touches console games now. Incredible difference in just 12 to 18 months. Fortunately that was my tell. I got out unscathed.

    I think GME is a value trap here. It could bounce if shorts run for the door in a panic but I'm not putting my money behind that hope. The sun is setting on GME.

  • Report this Comment On August 21, 2012, at 8:41 PM, ayalara wrote:

    How do you spell MOAT ?

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1986616, ~/Articles/ArticleHandler.aspx, 10/28/2016 10:47:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,216.87 47.19 0.26%
S&P 500 2,138.51 5.47 0.26%
NASD 5,222.63 6.65 0.13%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 10:31 AM
GME $24.03 Up +0.04 +0.17%
GameStop CAPS Rating: **
MSFT $60.22 Up +0.12 +0.20%
Microsoft CAPS Rating: ****
SNE $31.53 Down +0.00 +0.00%
Sony CAPS Rating: ***