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1 More Reason to Sell GameStop

When it comes to publicly traded retailers, there are three companies fighting losing battles.

  • Best Buy (NYSE: BBY  ) relies on small-ticket purchases of media items -- CDs, video games, DVDs, and books -- to draw repeat customers, but all of those platforms are being replaced by digital solutions that rub out the physical retail middleman.
  • RadioShack (NYSE: RSH  ) is using its small-box stores to emphasize smartphones, but margins are surprisingly crummy for resellers, and handset makers are also doing a better job of marketing directly to existing customers.
  • GameStop (NYSE: GME  ) has seen the video game industry decline in sales for three consecutive years. Outside of die-hard gamers, players have moved on to cheaper diversions in the form of free and nearly free apps that they can play on the phones, tablets, or PCs.

Now the market thinks that two of these three companies are on the way out. Despite the market landing fresh multiyear highs recently, Best Buy and RadioShack are trading near their own multiyear lows.

GameStop, on the other hand, is actually trading closer to its 52-week high than its low.

What's going on? Well, it's not as if the specialty retailer's fundamentals are improving. GameStop has been sharply slashing its comps guidance with every passing quarter this year. The same chain that expects same-store sales to climb by as much as 5% in March is now bracing investors for a decline of as much as 10%.

It's also certainly not GameStop's once-thriving resale business that's keeping the stock up. That business posted a double-digit decline last quarter, and that's not going to come back. The industry's shift to digital downloads and eventually cloud-based gaming doesn't leave any used physical games -- and eventually gear -- to trade back.  

The one thing keeping GameStop afloat is that it trades at a low earnings multiple, and aggressive share buybacks are keeping the per-share profitability looking more attractive than actual net income.

However, that won't be enough as the digital migration continues. Another sign on that front is Sony's (NYSE: SNE  ) new PS3. The Japanese gaming giant will roll out new consoles next week. The new slimmer models happen to come with more memory. Instead of the 160 GB and 320 GB configurations that are selling now, come Tuesday the new console will come in 250 GB and 500 GB flavors.

Why does Sony want gamers to have more storage memory? Well, clearly Sony wants gamers to download more games. They also wouldn't mind if you used that extra space for videos and music, giving you less of a reason to view your PS3 purchase as solely a gaming console.

GameStop can't be happy about this.

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 -- click here to learn more.

The Motley Fool owns shares of Best Buy, RadioShack, and GameStop. 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 (1) | Recommend This Article (3)

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  • Report this Comment On September 21, 2012, at 9:24 AM, TigerPack1 wrote:

    GME's problem is they earn way too much money in profits.

    This year EPS will be higher than last year's total and next year's will be higher than this year's EPS total.

    The introduction of used smartphones is creating a large boost for GME, as will plenty of other initiatvies both online and in the retail stores into 2013. Gamestop is much more than used video game cartridges, and is actually more of a unique and popular electronics flea market.

    Yes, gaming sales in the stores are in decline, but that does not mean the overall business is in trouble. Best Buy and Radio Shack's demise will greatly BENEFIT GameStop, as they will become the singular retail source for many used and new electronics located just down the street from most every consumer in America.

    GameStop's business future and valuation for investors are in quite an enviable position.

    Short sellers should focus on business operations that are losing money, not earning hundreds of millions for shareholder annually.

    10 years ago, nobody wanted to own Apple shares because they were losing the microcomputer wars to PCs and Microsoft. Then they came up with revolutionary products ouside their core competency that consumers loved. Focusing only on used video game sales is already missing half of GME's 2013 sales, and is a mistake for sellers.

    GME's value is its existing store and customer base, stellar brand name built over years, and intelligent corporate managers that are changing focus with the times. Of course huge profits during the transition are not the worst thing for GME stakeholders either.

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